CR Supplement 2018 PDF

The Institute of Chartered Accountants in England and Wales
CORPORATE REPORTING
IFRS SUPPLEMENT
For students who have studied Financial Accounting and
Reporting: UK GAAP
For exams in 2018
Supplement
www.icaew.com
Corporate Reporting – IFRS Supplement
The Institute of Chartered Accountants in England and Wales
ISBN: 978-1-78363-799-7
First edition 2017
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© ICAEW 2017
ii
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iii
iv
Contents
Purpose of this Supplement vi
A Overview of the transition from FAR (UK GAAP) to CR (IFRS) 1
B Summary of differences 9
C Terminology translation (UK GAAP vs IRS terminology) 17
D Key differences from UK GAAP 21
1. Reporting framework and ethics 23
2. Format of financial statements 35
3. Reporting financial performance 47
4. Property, plant and equipment 57
5. Intangible assets 69
6. Revenue and inventories 79
7. Leases 83
8. Financial instruments 91
9. Other standards 103
10. Group accounts: basic principles 111
11. Consolidated statement of financial position 125
12. Consolidated statements of financial performance 135
13. Associates and joint ventures 137
14. Group accounts: disposals 149
15. Group statement of cash flows 151
E IFRS with no UK equivalent: Earnings per share 153
F Model financial statements 165
Contents v
Purpose of this Supplement
To be eligible for the ICAEW's Audit Qualification (AQ), students who have studied Professional Level
Financial Accounting and Reporting: UK GAAP must pass Advanced Level Corporate Reporting and
satisfy all the other requirements of the AQ.
Corporate Reporting is based on IFRS, and so we have produced this supplement to support transition
from UK GAAP to IFRS.
It does so by providing:
 an overview of the transition from FAR UK GAAP to CR and guidance on how to use the
Supplement;
 a summary of the differences as listed in the ICAEW's syllabus document;
 a terminology translation table;
 detail of key differences with examples and questions;
 IFRS standards with no UK GAAP equivalent; and
 model financial statements.
We have also provided question practice with an online IFRS question bank. Here, specific areas can be
targeted to reinforce understanding.
This supplement should be used alongside the 2018 Corporate Reporting learning materials and not as
a substitute.
vi Corporate Reporting – IFRS Supplement

PART A
Overview of the transition

from FAR (UK GAAP) to CR
Introduction
Topic List
1 Transition to IFRS
2 Transition to Corporate Reporting (Advanced Level)
1
Introduction
The Supplement
If you have previously studied the UK GAAP version of Professional Level Financial Accounting and
Reporting (FAR), success in the Advanced Level Corporate Reporting (CR) exam involves two main
processes:
 Converting your UK GAAP knowledge to IFRS by learning the key differences.
 Stepping up from Professional to Advanced Level, an integrated exam, which requires more in-
depth knowledge and application.
While this involves some extra work, over and above what former IFRS FAR students need to do, there
are two main positive aspects to this:
First, while there are differences between IFRS and UK GAAP, many of the techniques and principles are
the same. You will often find when working through the examples in this supplement that the final
figure comes to the same under IFRS as under UK GAAP. The most visible differences are due to
terminology and layout, particularly of the balance sheet, or statement of financial position. However,
these differences are very straightforward and easy to learn. Bear in mind that FAR (UK GAAP) learning
materials already include comparisons with IFRS, so the material in this Supplement is not entirely new
to you.
Secondly, working through this Supplement will give you an opportunity to revise and consolidate your
Professional-Level knowledge. FAR material is brought forward knowledge (sometimes called 'assumed
knowledge') also required for CR, so in addition to learning the IFRS vs UK GAAP differences, the
Supplement will be useful revision of the basic principles learned at Professional Level which FAR (IFRS)
candidates will also need to know. This will stand you in good stead when moving to Advanced Level, as
you will not be distracted by knowledge gaps, and will be able to focus on the more demanding skills
required.
Navigation through the Supplement
Section overview
 While the supplement covers all the examinable UK/IFRS differences in detail, each section of
every chapter is allocated a priority as follows:
Priority Essential difference

Read carefully and work through any examples. You will definitely need to understand
these differences, and they are not necessarily obvious. An example of an essential
1 difference will be where IFRS results in a different number from UK GAAP in a similar
calculation, or where UK GAAP does not have an equivalent standard. Try a question
from the online Question Bank (see below) on as many Priority 1 areas as possible. Come
back to these areas as revision and skim re-read just before you start your CR studies.
Priority Useful information
Priority 2 areas help fill in background for Priority 1 areas and are helpful to your
understanding. An example might be the layout of a goodwill calculation where the
2 proportionate method of valuing non-controlling interest is used: this gives the same
answer under both UK GAAP and IFRS but is set out differently. By contrast, the fair value
method, only allowed under IFRS, would give a different answer, and is therefore Priority
1. Read through and work through the examples, but do not prioritise in terms of
question practice or revision.
Priority 'Nice to know'
As the name suggests, Priority 3 areas are general background information or minor
differences of detail, for example the wording of a definition where this does not change
3 the meaning in material ways. Read through quickly to set Priority 1 and 2 areas in
context, but no need to focus on these areas.
2 Corporate Reporting – IFRS Supplement

The online Question Bank
P
An online IFRS Question Bank is provided, from which students can select questions on key areas and A
areas where their knowledge from UK GAAP FAR needs refreshing. A contents table indicates what R
topics are tested in these questions and highlights questions that are key because they relate to an IFRS T
topic for which there was no UK GAAP equivalent. There is no need to work through the whole of this
Question Bank; if you have a good recollection and understanding of a topic covered in UK GAAP FAR,
and the topic has only minor differences, you should focus your question practice on priority areas.
The online Question Bank is available on the Corporate Reporting exam resources page, visit
icaew.com/examresources. A
A: Overview of the transition from FAR (UK GAAP) to CR (IFRS) 3

1 Transition to IFRS
Section overview
 Although FRS 102 is based on the IFRS for SMEs, there are still a number of differences between
FRS 102 and IFRS. Below is an overview: the differences will be discussed in more detail in Part D
of this Supplement.
1.1 Terminology and formats

Under FRS 102 financial statements are prepared in accordance with the Companies Act formats, under
IFRS the formats are set out in IAS 1, Presentation of Financial Statements.
These are covered in more detail in Part D Chapter 2 of this Supplement. The main differences concern
the balance sheet (called 'statement of financial position' under IFRS). The top half of the UK balance
sheet adds down to net assets (assets less liabilities) and the bottom half shows equity (share capital and
reserves). The top half of the IFRS statement of financial position adds down to total assets and the
bottom half adds down to equity and liabilities. You will soon get used to this.
IAS 1 uses the terminology of statement of financial position and statement of profit or loss. Whereas,
Companies Act terminology uses 'balance sheet' and 'profit and loss account', although entities
reporting under FRS 102 may use 'income statement' and 'statement of financial position'.
International terminology should be reasonably familiar to you as FRS 102 uses it, and your UK GAAP
FAR Study Manual used it when explicitly referring to FRS 102.
A terminology translation table can be found in Part C of this Supplement.
Exam note. If you were to write 'creditors' instead of 'payables' or 'stock' instead of 'inventories', you
would not lose marks, but your IFRS studies in this Supplement and for Corporate Reporting will be
easier if you're familiar with the terminology.
1.2 Concepts
FRS 102 identifies (among others) the qualitative characteristics of materiality, substance over form
and prudence. These are not identified as separate qualitative characteristics in the IASB Conceptual
Framework. The Conceptual Framework separately identifies the two fundamental qualitative
characteristics of relevance and faithful representation and then four enhancing qualitative
characteristics. FRS 102 makes no such distinction.
See Part D Chapter 1 for more detail and examples.
1.3 Discontinued operations

These are shown in a separate income statement column under FRS 102, in keeping with the
Companies Act format. Under IFRS 5, Non-Current Assets Held for Sale and Discontinued Operations,
entities are required to present results of discontinued operations in a single amount on the face of the
statement of profit or loss. This single figure should be the total of:
 the post-tax profits or loss of discontinued operations;
 the post-tax gain or loss recognised on the measurement to fair value less costs to sell or on the
disposal of the assets constituting the discontinued operation.
Under FRS 102 assets of a discontinued operation continue to be depreciated up to the date of disposal
and continue to be classified as part of tangible fixed assets. Under IFRS 5, depreciation ceases when an
asset is classified as 'held for sale' and held for sale assets are presented separately beneath current
assets.
See Part D Chapters 3 and 4 for more detail and examples.

1.4 Borrowing costs
P
FRS 102 states that an entity can choose whether or not to capitalise borrowing costs. IAS 23, Borrowing A
Costs requires all eligible borrowing costs to be capitalised. R
T
1.5 Property, plant and equipment

Different terminology is used. Instead of 'tangible fixed assets' and 'net book value' IFRS uses 'non- A
current assets' and 'carrying amount' for property, plant and equipment.
FRS 102 has no 'held for sale' category as in IFRS 5. Items of property, plant and equipment continue to
be held as part of tangible fixed assets and are depreciated up to the date of disposal under UK GAAP.
IFRS 5 instead requires that when the carrying amount of a non-current asset will be recovered
principally through sale, rather than continuing use, the asset must be classified as held for sale. A non-
current asset held for sale is presented separately from all other assets. Typically this separate
presentation is shown immediately below the sub-total for current assets. No depreciation is charged on
a held for sale asset.
1.6 Intangible assets

Under FRS 102, an entity can choose whether or not to capitalise development costs. IAS 38, Intangible
Assets requires all eligible development costs to be capitalised.
FRS 102 treats all intangible assets as having a finite useful life. If, exceptionally, it is not possible to
reliably estimate the useful life, then it should not exceed ten years. Under IFRS intangible assets can
have an indefinite life.
There are conditions that must be satisfied under both IFRS and UK GAAP before the capitalisation of
development costs is required/permitted.
1.7 Government grants

Under IAS 20, Accounting for Government Grants and Disclosure of Government Assistance, grants related
to assets are recognised in income over the expected useful life of the asset.
IAS 20 allows this to be done either by recognising the grant as deferred income or by deducting the
amount of the grant from the carrying amount of the asset.
FRS 102 requires government grants to be recognised based on either the performance model or the
accrual model. There is no option to deduct the amount of the grant from the carrying amount of the
asset.
1.8 Financial instruments

Entities reporting under FRS 102 measure financial instruments initially at transaction price, unless they
are measured at fair value through profit or loss. Under IAS 39, Financial instruments: Recognition and
Measurement initial measurement is at fair value. This will still be the case when IFRS 9, Financial
Instruments comes into force.

1.9 Goodwill
FRS 102 requires goodwill to be amortised over its useful life and there is a rebuttable presumption that
this should not exceed ten years. It is also subject to impairment review. Under IFRS 3, Business
Combinations goodwill is not amortised but is subject to an annual impairment review.
FRS 102 requires acquisition-related costs to be added to the cost of the combination. Under IFRS 3
these costs are expensed. The value of goodwill will therefore be lower under IFRS.
IFRS 3 requires the measurement of contingent consideration to be reassessed at fair value each year
and the difference taken to profit or loss (excluding shares). There is no such specific requirement for
this reassessment at each year end under FRS 102 instead any changes to the estimate of the contingent
consideration outside of the 12-month provisional period should be accounted for in accordance with
FRS 102 Section 10, Accounting Policies, Estimates and Errors.
Under FRS 102 negative goodwill is presented in the balance sheet directly under positive goodwill, as a
negative asset and amortised. Under IFRS 3 negative goodwill (referred to as a gain on bargain
purchase) is recognised in profit or loss.
1.10 Non-controlling interest

FRS 102 states that a non-controlling interest should be measured using the proportionate method
only. IFRS allows the proportionate method or the fair value method.
1.11 Exclusion of a subsidiary from consolidation

FRS 102 states that a subsidiary should be excluded from consolidation where severe long-term
restrictions apply or where the interest in the subsidiary is held exclusively with a view to subsequent
resale.
IFRS 10, Consolidated Financial Statements does not allow any exclusions from consolidation. Control
would have to be lost first.
1.12 Associates and joint ventures

FRS 102 recognises implicit goodwill on acquisition and requires it to be amortised. No separate
goodwill is recognised under IFRS. IFRS 12, Disclosure of Interests in Other Entities requires a number of
disclosures to be made in respect of associates and joint arrangements. FRS 102 includes no such
requirements.
1.13 Fair presentation vs true and fair view

IFRS requires 'fair presentation' rather than a true and fair view. As 'fair presentation' is explained as
representing faithfully the effects of transactions, there is unlikely to be any substantial difference in
practical terms between it and the true and fair concept.
Because international standards are designed to operate in all legal environments, they cannot provide
for departures from the legal requirements in any particular country. IAS 1, Presentation of Financial
Statements indicates that there are few, if any, circumstances where compliance with IFRS will be
fundamentally misleading. In effect, UK companies applying IFRS cannot take advantage of the true and
fair override.
Companies reporting under FRS 101 or FRS 102 are, however, reporting under the Companies Act, so
the true and fair override is still available to them.

1.14 IFRS with no UK equivalent
P
Certain IFRSs have no direct equivalent in FRS 102, mainly because FRS 102 deals with smaller A
companies and the standards relate to larger ones: R
T
 IAS 33, Earnings per Share.
 IFRS 5, Non-current Assets Held for Sale and Discontinued Operations. However, while there is no
separate standard on this, discontinued operations are covered in UK GAAP.
 IFRS 8, Operating Segments.
A
 IFRS 13, Fair Value Measurement.
See Chapters 3 and 8 and Part D for more detail and examples.
2 Transition to Corporate Reporting (Advanced Level)
Section overview
 Unlike Professional Level Financial Accounting and Reporting, Advanced Level Corporate
Reporting is an integrated paper.
 Knowledge will be assumed of:
– Financial Accounting and Reporting
– Audit and Assurance
– Background Knowledge of other Professional Level modules
 Questions will be much more demanding than at earlier levels.
2.1 The importance of integration

The aim of the Advanced Level Corporate Reporting module is as follows:
'To enable candidates to apply technical knowledge, analytical techniques and professional skills to
resolve compliance and business issues that arise in the context of the preparation and evaluation
of corporate reports and from providing audit services.
Candidates will be required to use technical knowledge and professional judgement to identify,
explain and evaluate alternatives and to determine the appropriate solutions to compliance issues,
giving due consideration to the needs of clients and other stakeholders. The commercial context
and impact of recommendations and ethical issues will also need to be considered in making such
judgements.'
It is clear from this that the application of technical knowledge (financial reporting, audit, assurance
and ethics) is integrated, so it is appropriate that these areas are studied together where possible.
At earlier levels you will have tended to study subjects in isolation, but this is no longer appropriate at
Advanced Level, and indeed in the real world.
2.2 Brought forward knowledge

This module assumes and develops the knowledge and skills acquired in the Financial Accounting and
Reporting module and in the Audit and Assurance module.
Background knowledge based upon the strategic elements of the Business Planning: Taxation; Business
Planning; Business Strategy & Technology; and Financial Management modules will also be required in
evaluating the business and financial risks of reporting entities.
Candidates who have previously studied FAR: UK GAAP will need to know the key differences between
this and IFRS, so that they are as ready to proceed to Advanced Level Corporate Reporting as candidates
who have previously studied FAR: IFRS. The information and practice they need is contained in this
Supplement.

2.3 Depth and difficulty
Advanced Level CR goes into considerably more depth than Professional Level FAR. While many of the
same IFRS and IAS are examined, the questions are much more demanding and often require
understanding of the interaction of various standards rather than focussing on one at a time. It is
important that you feel comfortable with the material you have studied at FAR, and in particular, that
you make full use of this Supplement, so that you are not disadvantaged as compared with former IFRS
students.

PART B
Summary of differences
9
Introduction
The purpose of this chapter is to summarise the differences between UK GAAP (FRS 102 and the
Companies Act) and IFRS which you have already studied for the Financial Accounting and Reporting UK
GAAP paper. It will also be a useful revision summary. Part B deals with these differences in more detail.

Differences between UK GAAP and IFRS
The following table is taken from the Financial Accounting and Reporting Technical Knowledge Grid.
These differences were examinable where the relevant section of FRS 102 was set at knowledge level 'A'
in the FAR paper. Knowledge of these differences, together with the knowledge and application which is
common to both UK and IFRS FAR papers, will be assumed when you begin your studies for the
Advanced Level Corporate reporting paper.
Note: Topics covered only, or mainly, at Advanced Level have not been included in this
Supplement.
Title Key examinable differences between FRS 102 (and Companies Act
2006 where appropriate) and IFRS
Section 2: Concepts and  Qualitative characteristics are based on fundamental qualitative P
Pervasive Principles characteristics of relevance and faithful representation and have A
enhancing qualitative characteristics, rather than the one tier R
approach of qualitative characteristics set out in FRS 102. T
 Four measurement bases are described, being historical cost,

current cost, realisable value and present value, rather than only two
in FRS 102, being historical cost and fair value.
Section 3: Financial  Separate statements should be presented for the statement of profit B
Statement Presentation or loss and other comprehensive income and the statement of
Section 4: Statement of changes in equity.
financial position  IAS 1 uses the same terminology as FRS 102, however CA 2006 uses
different terminology for line items in the statement of financial
Section 5: Statement of
position (balance sheet) such as receivables and payables, rather
Comprehensive Income and
than debtors and creditors and non-current assets rather than fixed
Income Statement
assets.
Section 6: Statement of
 Receivables and payables, current and non-current, should be
Changes in Equity and shown separately on the face of the statement of financial position.
Statement of Income and
Retained Earnings  Minor differences in the classification of headings on the face of the
financial statements.
Section 8: Notes to the
Financial Statements
Section 7: Statement of Cash No exemption from the preparation of a statement of cash flows is
Flows available for a member of a group where the parent entity prepares
publicly available consolidated financial statements and that member is
included in the consolidation.
Section 9: Consolidated and  Only two options for accounting for investments in subsidiaries,
Separate Financial associates and joint ventures in a parent entity's separate financial
Statements statements are provided, being cost, use of the equity method in
accordance with IAS 28 or measurement and recognition in
accordance with IFRS 9. FRS 102 provides three options.
 Additional disclosures are required.
 No specific guidance is provided on the accounting treatment for
exchanges of businesses and other non-monetary assets for an
interest in a subsidiary, joint venture or associate.
 No specific guidance is provided on the accounting treatment for
intermediate payment arrangements.
 The exemptions from the preparation of consolidated financial
statements are more restrictive, for example there is no exclusion of
a subsidiary from consolidation on the grounds of severe long-term
restrictions.
 The definition of control is wider and not solely linked to the power
to govern the financial and operating policies.
B: Summary of differences 11
 Special purpose entities are not specifically identified. FRS 102
requires such entities as being included in consolidated financial
statements where they are controlled.
 Simplified guidance on the treatment of total and partial acquisitions
and disposals of subsidiaries is provided.
Section 10: Accounting No specific guidance is provided on changing to the cost model when a
Policies, Estimates and Errors reliable measure of fair value is no longer available. FRS 102 specifically
states that this is not a change in accounting policy.
Section 11: Basic Financial  No simplified measurement provisions for basic financial instruments
Instruments are available.
Section 12: Other Financial  There are more complex categories for measurement after initial
Instruments Issues recognition with four for financial assets and two for financial
liabilities. FRS 102 has a more simplified measurement approach of
generally at amortised cost or fair value through profit or loss.
 Additional guidance in relation to hedge accounting is provided.
 More detailed and specific guidance on derecognition of financial
assets and liabilities and the accounting for non-closely related
embedded derivatives is provided.
 More detailed disclosures are required.
 Detailed guidance is provided on how fair value should be
determined and suitable valuation techniques.
Section 13: Inventories  Less guidance is provided on the measurement of inventories held
for distribution at no or nominal consideration, or through a non-
exchange transaction. FRS 102 states that these transactions should
be measured at adjusted cost (to recognise any loss of service
potential) and fair value respectively.
 Less guidance is provided on what should be included in
production overheads.
 Less guidance is provided on the reversal of impairment losses if
there are changes in economic circumstances or circumstances
which led to the impairment no longer existing.
Section 14: Investments in  No simplified guidance is provided on recognising an associate

Associates where the investor is not a parent and hence only prepares
individual company financial statements, instead under IFRS,
accounting for such financial instruments in individual financial
statements would follow guidance in IAS 27 and IFRS 9.
 More detail is provided in the definition of 'significant influence'.
 More detailed disclosures are required and are set out in a single
accounting standard, being IFRS 12.
Section 15: Investments in  Jointly controlled assets are classified as jointly controlled operations
Joint Ventures rather than as a joint venture. FRS 102 provides for the accounting
treatment for all types of joint venture arrangements, including the
separate treatment of jointly controlled assets.
 The treatment of a joint venture where the investor is not a parent
and hence only prepares individual company financial statements
should be recognised in accordance with the guidance in IAS 27
and IFRS 9. FRS 102 provides simplified guidance.
 Detailed disclosures are set out in a single accounting standard,
being IFRS 12.

Section 17: Property, Plant  The residual value, depreciation method and the useful life of an
and Equipment asset should be reviewed at least at each financial year-end. FRS 102
states that a review is only necessary where there are indicators that
a change exists.
 Compensation from third parties for items of property, plant and
equipment (referred to as tangible fixed assets in CA 2006) that
have been impaired/lost should be recognised in profit or loss when
it becomes 'receivable'. FRS 102 states that it should be recognised
when the receipt of the amount is 'virtually certain'.
 A plan to dispose of an asset before the previously expected date
should be recognised in accordance with IFRS 5 which deals with
non-current assets held for sale and would require the asset to be
valued at the lower of carrying amount and fair value less costs to P
sell. FRS 102 would instead identify this as an indicator of A
impairment which would trigger the calculation of the asset's R
recoverable amount for the purpose of determining whether the T
asset is impaired.
 A non-current asset held for sale would no longer be depreciated,
whereas FRS 102 would require the classification and measurement
of the asset to continue as normal without regard to the disposal.
B
Section 18: Intangible Assets  Development expenditure should be capitalised where it meets the
other than Goodwill recognition criteria. FRS 102 permits a choice of capitalisation or
recognising the amounts as part of profit or loss for the period.
 No specific exclusion is included for heritage assets.
 An intangible asset acquired in a business combination should be
recognised when it arises from legal or other contractual rights even
if there is no history or evidence of exchange transactions for the
same or similar assets and otherwise estimating fair value would be
dependent on immeasurable variables.
 If an intangible asset is acquired by way of a grant, the intangible
asset may be recognised at either fair value or at the nominal value
of the grant. FRS 102 requires fair value at the date the grant
becomes receivable.
 Intangible assets may have either finite or indefinite useful lives. FRS
102 considers all intangible assets to have a finite useful life.
 There is no restriction on the maximum useful life of an intangible
asset where an entity is unable to make a reliable estimate. FRS 102
sets a maximum useful life of ten years.
 Amortisation method and period for an intangible asset should be
reviewed at least at each financial year-end, rather than if indicators
of a change exist.
Section 19: Business  A more open definition of a business combination is provided

Combinations and Goodwill although additional discussion/guidance is provided in the basis of
conclusions.
 Common control transactions are outside of the scope of IFRS 3.
 Business combinations should be accounted for using the
acquisition method. FRS 102 requires the use of the purchase
method.
 A more open definition on the identification of the acquirer is
provided although additional discussion/guidance is provided in the
basis of conclusions.
 Acquisition-related costs should be recognised as period costs as
part of profit or loss. FRS 102 requires them to be included in the
cost of the business combination.
 Where control is achieved following a series of transactions, the
acquirer is required to remeasure its previously held equity interest
at its acquisition date fair value. FRS 102 states that the cost of the
business combination is the aggregate of the fair values of the
assets given, liabilities assumed and equity instruments issued by
the acquirer at the date of each transaction in the series.
 Post-acquisition changes to the calculation of goodwill are generally
not permitted. Contingent consideration should be reassessed at
fair value each year and the difference taken to profit and loss.
FRS 102 permits changes to goodwill for changes in the estimate of
contingent consideration
 (Assuming the adjustment is probable and can be reliably
estimated).
 Goodwill should not be amortised but instead annual impairment
reviews should be carried out. FRS 102 stipulates that goodwill
arising from a business combination is considered to have a finite
useful life and if a reliable estimate of the useful life of goodwill
arising from a business combination cannot be determined, a
maximum useful life of ten years is required.
 A gain on a bargain purchase, negative goodwill, should be
recognised immediately as a gain in profit or loss. FRS 102 requires
negative goodwill to be capitalised as a separate item within
goodwill and amortised over the period over which any related
losses are expected and as acquired non-monetary assets are
realised.
 The non-controlling interest may be measured based on the share
of ownership not held by the parent (ie, on a proportionate basis)
or at fair value. FRS 102 does not permit fair value.
 Additional narrative disclosures are required.
Section 20: Leases More detailed disclosures are set out in IAS 17.
Section 21: Provisions and Certain types of financial guarantee contracts are not within the
Contingencies standard's scope.
Section 22: Liabilities and No examinable differences.
Equity
Section 23: Revenue  No examinable differences for revenue recognition.
 FRS 102 includes a definition for turnover as well as one for revenue
 Construction contracts contain their own detailed guidance and
principles in IAS 11, rather the simplified approach taken in FRS 102.
However, the overriding principles are the same.
Section 24: Government  Government grants should be recognised on a systematic basis

Grants matching the related expenditure (which in practice means using a
capital or income approach). FRS 102 is more specific and states
that they should be recognised using either the performance model
or the accrual model (prohibiting the deduction of a government
grant from the carrying amount of the related asset).
 No guidance is provided on whether an accounting policy for the
treatment of government grants should be applied on a class-by-
class basis.
Section 25: Borrowing Costs  Borrowing costs should be included as part of the directly
attributable costs of a qualifying asset. FRS 102 permits a choice of
capitalisation or recognising the amounts as part of profit or loss for
the period.

 No specific guidance is provided on what constitutes 'expenditure
on the asset' for the purpose of applying a capitalisation rate to the
expenditure on the assets for determining the amount of borrowing
cost eligible for capitalisation. FRS 102 states that 'expenditure on
the asset' is the average carrying amount of the asset during the
period, including borrowing costs previously capitalised.
Section 27: Impairment of  Less guidance is provided on the measurement of fair value less
Assets costs to sell.
 Where future cash flows are estimated using financial budgets or
forecasts (covering a maximum of five years unless there is
justification for a longer period), extrapolation techniques should be
used.
P
 Reversals of impairment losses are permitted, except for goodwill. A
Additional disclosures are required. R
T
Section 29: Income Tax  Deferred taxation should be recognised on the basis of temporary
differences rather than FRS 102's timing differences.
 No guidance is provided on the treatment of VAT, since this is a UK
tax.
B
 IAS 12 is silent on the use of discounting for current tax, however
this is explicitly stated as not being required in FRS 102
 More detailed guidance is provided.
 Additional disclosures are set out in IAS 12.
Section 30: Foreign Currency  On the disposal of a net investment in a foreign operation any
Translation related exchange differences accumulated in equity should be
recognised in profit or loss. FRS 102 does not permit this
reclassification.
 Cumulative exchange differences recognised in other
comprehensive income should be presented as a separate
component of equity. FRS 102 includes no such requirement.
 Additional disclosures are required.
Section 32: Events after the A dividend declared after the end of the reporting period should be
End of the Reporting Period disclosed in the notes to the financial statements but may not be
presented as a segregated component of retained earnings (referred to as
the profit and loss account reserve in CA 2006) at the end of the
reporting period as permitted by FRS 102.
Section 33: Related Party No disclosure exemptions are permitted for transactions between two or
Disclosures more members of a group where the subsidiaries are wholly owned.
PART C
Terminology translation
Introduction
Topic List
1 Terminology translation table
17
Introduction
Two of the most striking, and also the most straightforward differences between UK GAAP and IFRS are
terminology and formats.
This chapter takes a look at terminology, and gives you some practice in moving from UK terminology
to IFRS terminology. Formats are covered in Part D Chapter 2.
18 Corporate Reporting Supplement – IFRS

1 Terminology translation table
Section overview
 FRS 102 uses mainly IFRS terminology, so this will not be unfamiliar, but you will be more used to
using Companies Act 2006 terminology
1.1 IFRS terminology

In the Corporate Reporting exam you will be producing financial statements and extracts from financial
statements based on IFRS.
FRS 102 is based on the IFRS for SMEs and uses mainly IFRS terminology, so you will have come across
IFRS terms before. Below are some of the terms that differ between the Companies Act on the one hand
and IFRS/FRS 102 on the other.
UK term (Companies Act) International term (IFRS or FRS 102)
Profit and loss account Statement of profit or loss (or statement of

profit or loss and other comprehensive income)
Turnover Revenue
Operating profit Profit from operations

P
A
Reducing balance depreciation Diminishing balance depreciation
R
T
Depreciation/depreciation expense(s) Depreciation charge(s)
Balance sheet Statement of financial position
Fixed assets Non-current assets
Net book value Carrying amount C
Tangible fixed assets Property, plant and equipment
Stocks Inventories
Trade debtors or Debtors Trade receivables
Prepayments Other receivables
Debtors and prepayments Trade and other receivables
Cash at bank and in hand Cash and cash equivalents
Creditors – amounts falling due within one year Current liabilities
Creditors – amounts falling due after more than Non-current liabilities

one year
Trade creditors or creditors Trade payables
Accruals Other payables
Creditors and accruals Trade and other payables
Revaluation reserve Revaluation surplus
Capital and reserves Equity
Profit and loss account (reserve) Retained earnings
C: Terminology and formats 19

Interactive question: Terminology
Requirement
Without cheating, fill in the IFRS equivalent of the UK terms in the table below. Then check your answer
against the table on the previous page.
UK term (Companies Act) International term (IFRS or FRS 102)
Accruals
Balance sheet
Capital and reserves
Cash at bank and in hand
Creditors – amounts falling due after more than

one year
Creditors – amounts falling due within one year
Creditors and accruals
Debtors and prepayments
Depreciation/depreciation expense(s)
Fixed assets
Net book value
Operating profit
Prepayments
Profit and loss account
Profit and loss account (reserve)
Reducing balance depreciation
Revaluation reserve
Stocks
Tangible fixed assets
Trade creditors or creditors
Trade debtors or Debtors
Turnover

PART D
Key differences from UK

GAAP
21
CHAPTER 1
Reporting framework and

ethics
Introduction
Examination context
Topic List
1 Key differences
2 Standard-setting process for IFRS
3 The IASB Conceptual Framework
Answers to Interactive questions
23
Introduction
Section 1 of this chapter gives a very brief summary of the differences as they affect concepts. Section 2
on the standard-setting process will be new to you as you will have studied this in the context of UK
GAAP. It will be assumed knowledge at Advanced Level. Section 3 on the IASB Conceptual Framework will
also be new, and will be revisited at Advanced Level. You should focus on the key differences, which will
be highlighted.

2 1 Key differences
Section overview
The qualitative characteristics of financial statements are structured differently in FRS 102, and FRS 102
has only two measurement bases rather than four.
1.1 Qualitative characteristics

FRS 102 identifies (among others) the qualitative characteristics of materiality, substance over form
and prudence. These are not identified as separate qualitative characteristics in the IASB Conceptual
Framework. The Conceptual Framework separately identifies the two fundamental qualitative
characteristics of relevance and faithful representation and then four enhancing qualitative
characteristics. FRS 102 makes no such distinction.
1.2 Measurement bases

Four measurement bases are described, being historical cost, current cost, realisable value and present
value, rather than only two in FRS 102, being historical cost and fair value.
2 2 Standard-setting process for IFRS
Section overview
IFRSs are developed through a formal system of due process and broad international consultation
involving accountants, financial analysts and other users and regulatory bodies from around the world.
2.1 Due process

The overall agenda of the IASB is initially set by discussion with the IFRS Advisory Council. The process
for developing an individual standard involves the following steps.
Step 1 P
During the early stages of a project, the IASB may establish an Advisory Committee to give advice on A
issues arising in the project. Consultation with the Advisory Committee and the IFRS Advisory Council R
T
occurs throughout the project.
Step 2
IASB may develop and publish Discussion Papers for public comment.
Step 3
D
Following the receipt and review of comments, the IASB develops and publishes an Exposure Draft for
public comment.
Step 4
Following the receipt and review of comments, the IASB issues a final International Financial Reporting
Standard.
Key differences: 1 Reporting framework and ethics 25

There are now 16 International Financial Reporting Standards (IFRSs) and 41 International Accounting
Standards (IASs).
The current list is as follows:
IASs / IFRSs Date of

issue/revision
IAS 1 Presentation of Financial Statements Sep 2007

IAS 2 Inventories Dec 2003
IAS 7 Statement of Cash Flows Dec 1992
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors Dec 2003
IAS 10 Events After the Reporting Period Dec 2003
IAS 11 Construction Contracts Dec 1993
IAS 12 Income Taxes Nov 2000
IAS 16 Property, Plant and Equipment Dec 2003
IAS 17 Leases Dec 2003
IAS 18 Revenue Dec 1993
IAS 19 Employee Benefits Jun 2011
IAS 20 Accounting for Government Grants and Disclosure of
Jan 1995
Government Assistance
IAS 21 The Effects of Changes in Foreign Exchange Rates Dec 2003
IAS 23 Borrowing Costs Jan 2008
IAS 24 Related Party Disclosures Dec 2003
IAS 26 Accounting and Reporting by Retirement Benefit Plans Jan 1995
IAS 27 Separate Financial Statements May 2011
IAS 28 Investments in Associates and Joint Ventures Dec 2003
IAS 29 Financial Reporting in Hyperinflationary Economies Jan 1995
IAS 30 Disclosure in the Financial Statements of Banks and Similar
Jan 1995
Financial Institutions
IAS 32 Financial Instruments: Presentation Dec 2003
IAS 33 Earnings Per Share Dec 2003
IAS 34 Interim Financial Reporting Feb 1998
IAS 36 Impairment of Assets Mar 2004
IAS 37 Provisions, Contingent Liabilities and Contingent Assets Sept 1998
IAS 38 Intangible Assets Mar 2004
IAS 39 Financial Instruments: Recognition and Measurement Dec 2003
IAS 40 Investment Property Dec 2003
IAS 41 Agriculture Feb 2001
IFRS 1 First Time Adoption of International Financial Reporting June 2003
Standards
IFRS 2 Share-based Payment Feb 2004
IFRS 3 Business Combinations Jan 2008

IASs / IFRSs Date of
issue/revision
IFRS 4 Insurance Contracts Mar 2004

IFRS 5 Non-current Assets Held for Sale and Discontinued Operations Mar 2004
IFRS 6 Exploration For and Evaluation of Mineral Resources Dec 2004
IFRS 7 Financial Instruments: Disclosures Aug 2005
IFRS 8 Operating Segments Nov 2006
IFRS 9 Financial Instruments Nov 2009
IFRS 10 Consolidated Financial Statements May 2011
IFRS 11 Joint Arrangements May 2011
IFRS 12 Disclosure of Interests in Other Entities May 2011
IFRS 13 Fair Value Measurement May 2011
IFRS 14 Regulatory Deferral Accounts Jan 2014
IFRS 15 Revenue from Contracts with Customers May 2014
IFRS 16 Leases Jan 2016
IFRS 17 Insurance contracts May 2017
Note: IFRS 9 and IFRS 15 are not effective until periods beginning on or after 1 January 2018 and
IFRS 16 is not effective until 1 January 2019. IFRS 17 is not effective until 1 January 2021. Early adoption
is possible for IFRSs 9, 15, 16 and 17.
2 3 The IASB Conceptual Framework
Section overview
The Conceptual Framework states that the objective of financial statements is to provide information
about the financial position, performance and cash flows of an entity to aid users in decision-making. P
A
R
3.1 Qualitative characteristics T
The two fundamental qualitative characteristics are relevance and faithful representation. In
addition there are four enhancing qualitative characteristics which enhance the usefulness of
information that is relevant and faithfully represented. These are: comparability, verifiability,
timeliness and understandability.
Note that the structure is different D
– FRS 102 has a one-tier list.
3.1.1 Relevance
The information provided in financial statements must be relevant to the decision-making needs of
users. Information has the quality of relevance when it is capable of influencing the economic decisions
of users by helping them evaluate past, present or future events or confirming, or correcting, their past
evaluations. Relevant financial information can be of predictive value, confirmatory value or both.
Information is material – and therefore has relevance – if its omission or misstatement, individually or
collectively, could influence the economic decisions of users taken on the basis of the financial
statements. Materiality depends on the size and nature of the omission or misstatement judged in the
surrounding circumstances. The size or nature of the item, or a combination of both, could be the
determining factor.

3.1.2 Faithful representation
The information provided in financial statements must be a faithful representation. A perfectly faithful
representation should be complete, neutral and free from error.
A complete depiction includes all information necessary for a user to understand the phenomenon
being depicted, including all necessary descriptions and explanations.
A neutral depiction is without bias in the selection or presentation of financial information. This means
that information must not be manipulated in any way in order to influence the decisions of users.
Free from error means there are no errors or omissions in the description of the phenomenon and no
errors made in the process by which the financial information was produced. It does not mean that no
inaccuracies can arise, particularly where estimates have to be made.
Transactions and other events and conditions should be accounted for and presented in accordance
with their substance and not merely their legal form. This enhances faithful representation.
3.1.3 Comparability
Comparability is the qualitative characteristic that enables users to identify and understand similarities
in, and differences among, items. Information about a reporting entity is more useful if it can be
compared with similar information about other entities and with similar information about the same
entity for another period or another date.
Users must be able to compare the financial statements of an entity through time to identify trends in its
financial position and performance. Users must also be able to compare the financial statements of
different entities to evaluate their relative financial position, performance and cash flows. Hence, the
measurement and display of the financial effects of like transactions and other events and conditions
must be carried out in a consistent way throughout an entity and over time for that entity, and in a
consistent way across entities. In addition, users must be informed of the accounting policies employed
in the preparation of the financial statements, and of any changes in those policies and the effects of
such changes.
3.1.4 Verifiability
Verifiability helps assure users that information faithfully represents the economic phenomena it
purports to represent. It means that different knowledgeable and independent observers could reach
consensus that a particular depiction is a faithful representation.
3.1.5 Timeliness
Information may become less useful if there is a delay in reporting it. There is a balance between
timeliness and the provision of reliable information.
If information is reported on a timely basis when not all aspects of the transaction are known, it may not
be complete or free from error.
Conversely, if every detail of a transaction is known, it may be too late to publish the information
because it has become irrelevant. The overriding consideration is how best to satisfy the economic
decision-making needs of the users.
3.1.6 Understandability
Financial reports are prepared for users who have a reasonable knowledge of business and economic
activities and who review and analyse the information diligently. Some phenomena are inherently
complex and cannot be made easy to understand. Excluding information on those phenomena might
make the information easier to understand, but without it those reports would be incomplete and
therefore misleading. Therefore matters should not be left out of financial statements simply due to their
difficulty as even well-informed and diligent users may sometimes need the aid of an advisor to
understand information about complex economic phenomena.

3.1.7 Balance between benefit and cost
The benefits derived from information should not exceed the cost of providing it. The evaluation of
benefits and costs is substantially a judgemental process. Also, the costs are not necessarily borne by
those users who enjoy the benefits, often the benefits of the information are enjoyed by a broad range
of external users.
Interactive question 1: Which concept applies in this scenario?
Question Fill in your answer
Sycamore Ltd has always valued inventories (stocks)

using the FIFO basis. A new financial controller has
pointed out that the weighted average basis is more
appropriate for their industry, so for this year
inventories will be valued using the weighted average
method.
See Answer at the end of this chapter.
The following diagram may help your learning:
Qualitative characteristics
Faithful
Relevance representation
Complete Neutral Free from Substance

Nature of Materiality error over form
transaction (implied)
Enhancing characteristics
P
A
R
T
Comparability Verifiability Timeliness Understandability
Constraint
Cost vs benefit
3.2 Financial position

The financial position of an entity is the relationship of its assets, liabilities and equity as of a specific date
as presented in the statement of financial position (balance sheet). These are defined as follows:
(a) An asset is a resource controlled by the entity as a result of past events and from which future
economic benefits are expected to flow to the entity.
(b) A liability is a present obligation of the entity arising from past events, the settlement of which is
expected to result in an outflow from the entity of resources embodying economic benefits.
(c) Equity is the residual interest in the assets of the entity after deducting all its liabilities.

3.3 Financial performance
Performance is the relationship of the income and expenses of an entity during a reporting period. IAS 1,
Presentation of Financial Statements permits entities to present performance in a single financial statement (a
statement of comprehensive income) or in two financial statements (a statement of profit or loss and a
statement of profit or loss and other comprehensive income).
Income and expenses are defined as follows:
(a) Income is increases in economic benefits during the reporting period in the form of inflows or
enhancements of assets or decreases of liabilities that result in increases in equity, other than those
relating to contributions from equity investors.
(b) Expenses are decreases in economic benefits during the reporting period in the form of outflows
or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those
relating to distributions to equity investors.
The recognition of income and expenses results directly from the recognition and measurement of
assets and liabilities.
3.4 Income
The definition of income encompasses both revenue and gains.
(a) Revenue is income that arises in the course of the ordinary activities of an entity and is referred to
by a variety of names including sales, fees, interest, dividends, royalties and rent.
(b) Gains are other items that meet the definition of income but are not revenue.
3.5 Expenses
The definition of expenses encompasses losses as well as those expenses that arise in the course of the
ordinary activities of the entity.
(a) Expenses that arise in the course of the ordinary activities of the entity include, for example, cost of
sales, wages and depreciation. They usually take the form of an outflow or depletion of assets such
as cash and cash equivalents, inventory, or property, plant and equipment.
(b) Losses are other items that meet the definition of expenses and may arise in the course of the
ordinary activities of the entity.
3.6 Recognition
Recognition is the process of incorporating in the statement of financial position (balance sheet) or
statement of comprehensive income an item that meets the definition of an asset, liability, equity,
income or expense and satisfies the following criteria:
(a) It is probable that any future economic benefit associated with the item will flow to or from the
entity.
(b) The item has a cost or value that can be measured reliably.
3.6.1 Assets
An entity should recognise an asset in the statement of financial position when it is probable that the future
economic benefits will flow to the entity and the asset has a cost or value that can be measured reliably.
3.6.2 Liabilities
An entity should recognise a liability in the statement of financial position when:
(a) the entity has an obligation at the end of the reporting period as a result of a past event;
(b) it is probable that the entity will be required to transfer resources embodying economic benefits in
settlement; and
(c) the settlement amount can be measured reliably.

3.6.3 Income
The recognition of income results directly from the recognition and measurement of assets and
liabilities.
3.6.4 Expenses
The recognition of expenses results directly from the recognition and measurement of assets and
liabilities.
3.7 Measurement
The Conceptual Framework mentions four measurement bases for items or transactions:
 Historical cost FRS 102 only had historical cost and
 Current cost fair value.
 Realisable value
 Present value
3.7.1 More detail on the measurement bases

For an item or transaction to be recognised in an entity's financial statements it needs to be measured
as a monetary amount. IFRS uses several different measurement bases but the Conceptual Framework
refers to just four.
The four measurement bases referred to in the Conceptual Framework are as follows:
 Historical cost. Assets are recorded at the amount of cash or cash equivalents paid or the fair value
of the consideration given to acquire them at the time of their acquisition. Liabilities are recorded
at the amount of proceeds received in exchange for the obligation, or in some circumstances (for
example, income taxes), at the amounts of cash or cash equivalents expected to be paid to satisfy
the liability in the normal course of business.
 Current cost. Assets are carried at the amount of cash or cash equivalents that would have to be
paid if the same or an equivalent asset was acquired currently.
Liabilities are carried at the undiscounted amount of cash or cash equivalents that would be
required to settle the obligation currently.
 Realisable (settlement) value. P
A
– Realisable value. The amount of cash or cash equivalents that could currently be obtained by R
selling an asset in an orderly disposal. T
– Settlement value. The undiscounted amounts of cash or cash equivalents expected to be

paid to satisfy the liabilities in the normal course of business.
 Present value. A current estimate of the present discounted value of the future net cash flows in
the normal course of business.
D
Historical cost is the most commonly adopted measurement basis, but this is usually combined with
other bases eg, an historical cost basis may be modified by the revaluation of land and buildings.
Interactive question 2: Measurement

(a) Explain why inventories should be recognised as an asset in the statement of financial position.
(b) Identify the two measurement bases which should be used to determine the amount at which the
inventories should be recognised in the financial statements.
State whether the measurement bases identified are found in FRS 102, the IASB Conceptual
Framework or both.

3.8 Accrual basis
An entity should prepare its financial statements, except for cash flow information, using the accrual
basis of accounting.
3.9 Fair presentation versus true and fair view

IFRS requires 'fair presentation' rather than a true and fair view. As 'fair presentation' is explained as
representing faithfully the effects of transactions, there is unlikely to be any substantial difference in
practical terms between it and the true and fair concept.
Because international standards are designed to operate in all legal environments, they cannot provide
for departures from the legal requirements in any particular country. IAS 1, Presentation of Financial
Statements indicates that there are few, if any, circumstances where compliance with IFRS will be
fundamentally misleading. In effect, UK companies applying IFRS cannot take advantage of the true and
fair override.
Companies reporting under FRS 102 are however reporting under the Companies Act, so the true and
fair override is still available to them.

Answer to Interactive question 1
Question Answer
Sycamore Ltd has always valued inventories (stocks) This is a change of accounting policy. The
using the FIFO basis. A new financial controller has change of valuation method will affect the
pointed out that the weighted average basis is more comparability of the financial statements from
appropriate for their industry, so for this year one year to the next, so Sycamore Ltd must
inventories will be valued using the weighted restate the prior year financial statements to
average method. show inventories under the weighted average
method.

(a) Inventories are recognised as an asset in the statement of financial position for the following
reasons:
(i) They meet the definition of an asset – they are resources controlled by the entity as a result of
past events and from which future economic benefits (cash flows, inflows, revenue, profits,
income) are expected to flow to the entity.
(ii) They satisfy the recognition criteria – it is probable that future economic benefits will flow to
the entity and the inventories have a cost or value that can be measured reliably.
(b) Historical cost and (net) realisable value. Of these, historical cost is found in both FRS 102 and the
Conceptual Framework. (Net) realisable value is only found in the Conceptual Framework.
P
A
R
T

CHAPTER 2
Format of financial
statements
Introduction
Topic List
1 Key differences
2 Statement of financial position
3 Statement of profit or loss and other comprehensive income
Answers to Interactive question
35
Introduction
You will have been introduced to the basics of company accounts in the Accounting paper. In this paper
however, you are expected to have a much more detailed understanding of the preparation of financial
statements and a thorough knowledge of the regulation in this area. This knowledge will be assumed at
the Advanced Level.

2 1 Key differences
Section overview
 In the UK the presentation of financial statements is dealt with in the Companies Act 2006 and
FRS 102, The Financial Reporting Standard applicable in the UK and Republic of Ireland.
 IFRS formats are set out in IAS 1, Presentation of Financial Statements.
1.1 Presentation of financial statements

In the UK the Companies Act sets out balance sheet and profit and loss account formats. In general
terms the requirements are similar to those of IAS 1.
The key differences between international and UK formats are as follows:
 Different terminology is used.
International terminology UK terminology
Statement of financial position Balance sheet/statement of financial position
Statement of profit or loss Profit and loss account/income statement
Revenue Turnover
Receivables Debtors
Payables Creditors
Non-current assets Fixed assets
Property, plant and equipment Tangible fixed assets
Non-current liabilities Creditors falling due after more than one year
Current liabilities Creditors falling due within one year
Retained earnings Profit and loss account (reserve)
 The Companies Act profit and loss account formats require less detail than IAS 1, although IAS 1
allows some of the extra detail to be presented in the notes.
 The Companies Act balance sheet formats are less flexible than the IAS 1 formats.
P
The formats in IAS 1 are contained in the Guidance on Implementation and are therefore not A
mandatory. The Companies Act formats are enshrined in law. R
T
 The UK balance sheet (called statement of financial position in FRS 102) is usually prepared on a
net assets basis.
Fixed assets are added to net current assets (current assets less current liabilities) and long-term
liabilities are deducted from the result. IAS 1 allows more flexibility in formats.
 IFRS does not require a separate column for discontinued operations in the statement of profit or D
loss and other comprehensive income.
1.1.1 Extraordinary items

FRS 102 defines extraordinary items as: 'material items possessing a high degree of abnormality which
arise from events or transactions that fall outside the ordinary activities of the reporting entity and which
are not expected to recur'.
Extraordinary items would in theory be disclosed on the face of the profit and loss account. In practice,
extraordinary items are unlikely to arise given the extremely broad definition of 'ordinary items'.
IAS 1 does not permit any item to be presented as extraordinary but simply says that material items of
income and expense should be disclosed separately.
Key differences: 2 Format of financial statements 37

1.2 Statement of cash flows
The format of the statement of cash flows under FRS 102 is the same as the IFRS format.
Entities eligible for disclosure exemptions under FRS 102 are also exempt from preparation of a
statement of cash flows.
1 2 Statement of financial position
Section overview
 IAS 1 provides guidance on the layout of the statement of financial position.
 IAS 1 specifies that certain items must be shown in the statement of financial position.
 Other information is required in the statement of financial position or in the notes.
 Both assets and liabilities must be separately classified as current and non-current.
2.1 Statement of financial position format

IAS 1 suggests a format for the statement of financial position although it does not prescribe the order
or format in which the items listed should be presented. The layout below is consistent with the
minimum requirements of IAS 1 and will be used in your Corporate Reporting studies.
PROFORMA STATEMENT OF FINANCIAL POSITION
XYZ plc – Statement of financial position as at 31 December 20X7

£ £
ASSETS
Non-current assets
Property, plant and equipment 350,700
Intangible assets 308,270
Investments 242,650
901,620
Current assets
Inventories 135,230
Trade and other receivables 91,600
Investments 25,000
Cash and cash equivalents 153,953
405,783
Non-current assets held for sale 25,650
431,433
Total assets Not a separate category in UK 1,333,053
GAAP – would be included in total
non-current assets. Discussed in
Chapter 3.
Total assets
rather than
net assets

£ £
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Ordinary share capital 600,000
Preference share capital (irredeemable) 30,000
Share premium account 20,000
Revaluation surplus 2,053
Retained earnings 243,900
895,953
Non-controlling interest 72,950
968,903
Non-current liabilities
Preference share capital (redeemable) 28,000
Finance lease liabilities 28,850
Borrowings 120,800
177,650
Current liabilities
Trade and other payables 115,100
Dividends payable Total equity and 7,500
Taxation liabilities rather than 34,500
Provisions just total equity 5,000
Borrowings (= share capital and 10,000
Finance lease liabilities reserves) 14,400
186,500
Total equity and liabilities 1,333,053
2.2 Information which must be presented in the statement of financial

position
IAS 1 specifies various items which must be presented in the statement of financial position:
 Property, plant and equipment
 Investment property
 Intangible assets
 Financial assets
 Investments accounted for using the equity method (see Chapter 13)
 Assets classified as held for sale P
 Inventories A
R
 Trade and other receivables
T
 Cash and cash equivalents
 Trade and other payables
 Provisions
 Financial liabilities
 Current and deferred tax assets and liabilities
 Non-controlling interest (see Chapter 10) D
 Issued capital and reserves attributable to owners of the parent
Any other line items, headings or sub-totals should be shown in the statement of financial position
when it is necessary for an understanding of the entity's financial position.
This decision depends on judgements based on the assessment of the following factors.
 Nature and liquidity of assets and their materiality. Thus goodwill and assets arising from
development expenditure will be presented separately, as will monetary/non-monetary assets and
current/non-current assets.
 Function within the entity. Operating and financial assets, inventories, receivables and cash and
cash equivalents are therefore shown separately.
 Amounts, nature and timing of liabilities. Interest-bearing and non-interest-bearing liabilities and
provisions will be shown separately, classified as current or non-current as appropriate.

The standard also requires separate presentation where different measurement bases are used for
assets and liabilities which differ in nature or function. According to IAS 16, Property, Plant and
Equipment, for example, it is permitted to carry certain items of property, plant and equipment at cost
or at a revalued amount. Property, plant and equipment may therefore be split to show classes held at
historical cost separately from those that have been revalued.
2.3 Information presented either in the statement of financial position or in

the notes
Certain pieces of information may be presented either in the statement of financial position or in the
notes to the financial statements.
These comprise the following:
 Further sub-classification of line items from the statement of financial position. Disclosures will vary
from item to item, which will in part depend on the requirements of IFRS. For example, tangible
assets are classified by class of asset (eg, land and buildings, plant and equipment) as required by
IAS 16, Property, Plant and Equipment.
 Details about each class of share capital.
 Details about each reserve within equity.
Interactive question: Formats

Hatchback Motor Components Ltd has the following balance sheets as at 30 April 20X7 and 20X6:
Balance sheets at 30 April
20X7 20X6
£ £ £ £
Fixed assets
Tangible assets 26,146,000 25,141,000
Investments 7,100,000 –
33,246,000 25,141,000
Current assets
Stocks 16,487,000 15,892,000
Trade and other debtors 12,347,000 8,104,000
Cash at bank and in hand 863,000 724,000
29,697,000 24,720,000
Creditors – amounts falling
due within one year (6,767,000) (5,105,000)
Net current assets 22,930,000 19,615,000
Total assets less current
liabilities 56,176,000 44,756,000
Creditors – amounts falling
due after more than one
year (borrowings) (3,250,000) (4,250,000)
Net assets 52,926,000 40,506,000
Capital and reserves

Called up share capital (£1 ordinary shares) 13,000,000 10,000,000
Share premium account 12,500,000 5,000,000
Revaluation reserve 2,650,000 2,650,000
Profit and loss account 24,776,000 22,856,000
52,926,000 40,506,000
Requirement:
Using the same information, re-draft the above balance sheets to conform with IFRS layouts and
terminology.

2 3 Statement of profit or loss and other comprehensive
income
Section overview
 IAS 1 requires all items of income and expense in a period to be presented either:
– in a single statement of profit or loss and other comprehensive income, or
– in two statements: a separate statement of profit or loss and a statement of profit or loss and
other comprehensive income which begins with 'profit for the year'.
 Expenses can be classified by function or by nature.
3.1 Statement of profit or loss and other comprehensive income – format

The standard gives the following examples of the formats for the single statement and the two separate
statements. The only items under 'other comprehensive income' which are included in your syllabus are
valuation gains/losses. For the purposes of your exam only the single statement approach will be
examined.
Note that here the single statement format shows the classification of expenses in the statement of
profit or loss by function and the two statement format shows expenses classified by nature. As
expense classification by function is more common in practice, this is the method that will be tested in
the exam for the preparation of a complete statement of profit or loss (ie, from a trial balance or draft
statements). However, expenses classified by nature may be tested in an extracts question or in an
explain style question.
Single statement format
XYZ plc – Statement of profit or loss and other comprehensive income for the year ended
31 December 20X7 (illustrating a single statement approach)
Illustrating the classification of expenses by function
£
Revenue 390,000
Cost of sales (245,000)
Gross profit 145,000
Other income 20,667
Distribution costs (9,000) P
Administrative expenses (20,000) A
Other expenses (2,100) R
Profit/(loss) from operations 134,567 T
Finance costs (8,000)
Share of profits/(losses) of associates 35,100
Profit/(loss) before tax 161,667
Income tax expense (40,417)
Profit/(loss) for the year from continuing operations 121,250
D
Profit/(loss) for the year from discontinued operations –
Profit/(loss) for the year 121,250
Other comprehensive income:
Gains on property revaluation 933
Income tax relating to component of other comprehensive income (280)
Other comprehensive income for the year, net of tax 653
Total comprehensive income for the year 121,903
Profit attributable to:
Owners of the parent 97,000
121,250
Total comprehensive income attributable to:
121,903

Point to note: The sub-total 'profit/loss from operations' is not a current requirement of IAS 1. These
learning materials use this description as it is used in practice and is not prohibited by IAS 1.
In your exam only the single statement approach will be tested.
Revaluation of non-current assets will be dealt with in Chapter 4.
Two statement format
XYZ plc – Statement of profit or loss for the year ended 31 December 20X7
(illustrating the two statement approach)
Illustrating the classification of expenses by nature
£
Revenue 390,000
Other income 20,667
Changes in inventories of finished goods and work in progress (115,100)
Work performed by the entity and capitalised 16,000
Raw material and consumables used (96,000)
Employee benefits expense (45,000)
Depreciation and amortisation expense (26,000)
Impairment of property, plant and equipment (4,000)
Other expenses (6,000)
Profit/(loss) from operations 134,567
Finance costs (8,000)
Share of profit of associates 35,100
Profit before tax 161,667
Profit for the year from continuing operations 121,250
Loss for the year from discontinued operations –
Profit for the year 121,250
Profit attributable to:
121,250
XYZ plc – statement of profit or loss and other comprehensive income for the year ended
31 December 20X7 (illustrating the two statement approach)
£
Income tax relating to components of other comprehensive income (280)
Other comprehensive income for the year, net of tax 653
Total comprehensive income for the year 121,903
121,903
3.2 Information presented in the statement of profit or loss (under the two
statement approach)
The standard lists the following to be included in the statement of profit or loss (under the two
statement approach).
 Revenue
 Finance costs
 Share of profits and losses of associates and joint ventures accounted for using the equity method
(we will look at associates and joint ventures in Chapter 13)

 Income tax expense
 A single amount comprising the total of:
– the post-tax profit or loss of discontinued operations; and
– the post-tax gain or loss recognised on the measurement to fair value less costs to sell or on
the disposal of the assets constituting the discontinued operation.
 Profit or loss
The following items must be disclosed in the statement of profit or loss as allocations of profit or loss for
the period.
 Profit or loss attributable to non-controlling interest
 Profit or loss attributable to owners of the parent
The allocated amounts must not be presented as items of income or expense. (These issues relate to
group accounts, covered later in this supplement.)
Point to note: Income and expense items can only be offset in certain circumstances.
3.3 Information presented in the statement of profit or loss and other

comprehensive income (under the two statement approach)
The standard lists the following as the minimum to be included in the statement of profit or loss and
other comprehensive income (under the two statement approach).
 Each component of other comprehensive income
 Total comprehensive income
The following items must be disclosed in the statement of profit or loss and other comprehensive
income as allocations of total comprehensive income for the period.
 Total comprehensive income attributable to non-controlling interest
 Total comprehensive income attributable to owners of the parent
3.4 Key difference from UK GAAP: no column for discontinued operations

Discontinued operations will be discussed in Chapter 3. Below is an example, for illustrative purposes
only, showing the UK GAAP requirement for an extra column for discontinued operations.
P
A
R
T

Group profit and loss account and other comprehensive income
Continuing Discontinued
operations operations Total
£m £m £m
Turnover 170 35 205
Cost of sales (135) (21) (156)
Gross profit 35 14 49
Distribution costs (9) (4) (13)
Administrative expenses:
Before exceptional items (11) (5) (16)
Fire damage (4) – (4)
(15) (5) (20)
11 5 16
Other operating income 3 – 3
Group operating profit 14 5 19
Share of profit of associate 4 – 4
Amortisation of goodwill (2) – (2)
Loss on sale of discontinued operations – (7) (7)
Profit on ordinary activities before interest and 16 (2) 14
taxation
Interest receivable and other similar income 1 – 1
Interest payable and similar charges (2) – (2)
Profit on ordinary activities before tax 15 (2) 13
Tax on profit on ordinary activities (4) – (4)
Profit for the financial year 11 (2) 9
Total other comprehensive income 2
Total comprehensive income for the year 11
Profit for the financial year attributable to:

Non-controlling interests 2
Owners of the parent company 7
Profit for the year 9
Owners of the parent company 9
11

Answer to Interactive question

Statements of financial position at 30 April
20X7 20X6
£ £ £ £
ASSETS
Non-current assets
Property, plant and equipment 26,146,000 25,141,000
Investments 7,100,000 –
33,246,000 25,141,000
Current assets
Inventories 16,487,000 15,892,000
Trade and other receivables 12,347,000 8,104,000
Cash and cash equivalents 863,000 724,000
29,697,000 24,720,000
Total assets 62,943,000 49,861,000
Equity
Ordinary share capital (£1 ordinary shares) 13,000,000 10,000,000
Share premium 12,500,000 5,000,000
Revaluation surplus 2,650,000 2,650,000
Retained earnings 24,776,000 22,856,000
52,926,000 40,506,000
Non-current liabilities (borrowings) 3,250,000 4,250,000
Current liabilities 6,767,000 5,105,000
Total equity and liabilities 62,943,000 49,861,000
P
A
R
T

CHAPTER 3
Reporting financial
performance
Introduction
Topic List
1 Key differences
2 IFRS 5 and discontinued operations
3 IAS 24, Related Party Disclosures
Answer to Interactive questions
47
Introduction
Most of the differences relating to performance reporting are not significant. The main difference relates
to discontinued operations: there is no UK equivalent of IFRS 5, Non-current Assets Held for Sale and
Discontinued Operations.

2 1 Key differences
Section overview
There are some differences between FRS 102, IAS 24, Related Party Disclosures and IFRS 5, Non-current
Assets Held for Sale and Discontinued Operations.
1.1 Reporting performance

FRS 102 states that a change to the cost model when a reliable measure of fair value is no longer
available is not to be treated as a change of accounting policy. IAS 8 does not state this.
1.2 Continuing and discontinued operations

IFRS 5 requires a single amount to be shown for discontinued operations in the statement of profit or
loss comprising of the total of the post-tax profit or loss of discontinued operations and the post-tax
gain or loss recognised on the measurement to fair value less costs to sell or on the disposal of the assets
constituting the discontinued operation.
Under FRS 102 entities disclose discontinued operations in a separate column in the profit and loss
account (income statement), showing the amount for all income and expense lines attributable to
discontinued operations.
When the net book value of a non-current asset (tangible fixed asset) will be recovered principally
through sale, rather than continuing use, the asset must be classified as held for sale under IFRS 5 (see
Chapter 4). FRS 102 does not have the category of 'held for sale'. Assets of a discontinued operation
continue to be depreciated up to the date of disposal.
 Continuing and discontinued activities must be analysed. Unlike IFRS 5 detailed analysis is shown
on face of the income statement (profit and loss).
 Classification and measurement of assets generally continues as normal without regard for the
disposal. This includes depreciation until the date of disposal. IFRS 5 on the other hand requires
depreciation to cease while a non-current asset is held for sale as well as separate classification.
Because of the extent of the differences, IFRS 5 is covered in full in this chapter.
1.3 Foreign currency transactions P

A
IAS 21 requires that where exchange differences have been presented in other comprehensive income, R
the cumulative amount is shown as a separate component of equity. There is no such requirement in T
FRS 102.
1.4 Related party transactions

IAS 24 requires disclosure of transactions entered into between two or more members of a group.
D
FRS 102 does not require disclosure as long as any subsidiary which is a party to the transaction is
wholly owned by the other party to the transaction.
1.5 Earnings per share

Entities reporting under FRS 102 are required to apply IAS 33, Earnings per Share. This is covered in
Part E of this Supplement.
Key differences: 3 Reporting financial performance 49

1 2 IFRS 5 and discontinued operations
Section overview
The results of discontinued operations should be presented separately in the statement of profit or loss.
2.1 The problem

The ability to predict the future performance of an entity is hampered when the financial statements
include activities which as a result of sale or closure will not continue into the future. While figures
inclusive of those activities are a fair measure of past performance, they do not form a good basis for
predicting the future cash flows, earnings-generating capacity and financial position. Separating out
data about discontinued activities benefits users of financial statements, but leads to difficulties in
defining such operations and in deciding when a discontinuance comes about. This problem is
addressed by IFRS 5, Non-current Assets Held for Sale and Discontinued Operations.
2.2 The objectives of IFRS 5 regarding discontinued operations

Part of IFRS 5 is designed to deal with the problem by requiring entities to disclose in the statement of
profit or loss and statement of cash flows the results of discontinued operations separately from those of
continuing operations and to make certain disclosures in the statement of financial position. This
chapter only deals with IFRS 5's definition of discontinued operations and its disclosure requirements;
the other aspects are concerned with measurement and recognition of profits and losses on non-current
assets held for sale and these are covered in Chapter 4.
There are two parts of the Chapter 4 coverage which are relevant to the disclosure rules dealt with in
this chapter:
 The key criterion for the classification of a non-current asset as held for sale is that it is highly
probable that it will be finally sold within 12 months of classification.
 A non-current asset held for sale is measured at the lower of carrying amount and fair value less
costs to sell. The effect is that if fair value less costs to sell is lower than the carrying amount of the
asset, then the loss is recognised at the time the decision is made to dispose of the asset, not when
the disposal actually takes place.
2.3 Discontinued operations

Definitions
Discontinued operation: A component of an entity that has either been disposed of, or is classified as
held for sale, and:
 represents a separate major line of business or geographical area of operations;
 is part of a single co-ordinated plan to dispose of a separate major line of business or geographical
area of operations; or
 is a subsidiary acquired exclusively with a view to resale.
Component of an entity: Operations and cash flows that can be clearly distinguished, operationally
and for financial reporting purposes, from the rest of the entity.
As already noted, the separation of information about discontinued activities benefits users of financial
statements by providing them with information about continuing operations which they can use as the
basis for predicting the future cash flows, earnings-generating capacity and financial position.
Management is therefore faced with the temptation to classify continuing, but underperforming,
operations as discontinued, so that their performance does not act as a drag on the figures used as a
basis for future predictions. This is why the definition of a discontinued operation is so important, but
applying that definition requires difficult judgements.

Consider the following:
 The abrupt cessation of several products within an ongoing line of business: presumably a line of
business must be defined by reference to the requirement in the definition for a component to be
'distinguished operationally and for financial reporting purposes'. But how many products have to
be stopped before the line of business itself is stopped?
 Selling a subsidiary whose activities are similar to those of other group companies: how should
'similar' be defined?
2.4 When does a discontinuance come about?

IFRS 5 does not set out specific criteria for when a discontinuance comes about, despite its importance
in terms of defining the accounting period in which disclosures must first be made. Instead, it relies on
the definition of a discontinued operation, but this comes in two parts; it is a component of the entity
which:
 has been disposed of. In this case, the disclosures will first be made in the accounting period in
which the disposal takes place; or
 is held for sale. In this case the disclosures will first be made in the accounting period in which the
decision to dispose of it is made, provided that it is highly probable that it will be sold within
12 months of classification.
If a business decides to discontinue operations and the non-current assets supporting these operations
are to be abandoned (so scrapped or just closed down) rather than sold, the carrying amount of the
assets will not be recovered principally through sale. So these assets cannot be classified as held for sale.
As a result, these operations should not be disclosed as discontinued until the underlying assets actually
cease to be used.
Point to note: Operations supported by assets which become idle because they are temporarily taken
out of use may not be described as discontinued. This includes, for example, assets that are mothballed
and may be brought back into use if market conditions improve.
2.5 Presenting discontinued operations: statement of profit or loss and

statement of cash flows
An entity should disclose a single amount in the statement of profit or loss comprising the total of:
P
 the post-tax profit or loss of discontinued operations; and A
R
 the post-tax gain or loss recognised on the measurement to fair value less costs to sell or on the T
disposal of the assets constituting the discontinued operation.
An entity should also disclose an analysis of this single amount into the following:
 The revenue, expenses and pre-tax profit or loss of discontinued operations
 The related income tax expense D
 The gain or loss recognised on measurement to fair value less costs to sell or on disposal of the
assets constituting the discontinued operation
 The related income tax expense
This analysis may be presented either:
 in the statement of profit or loss; or
 in the notes
If it is presented in the statement of profit or loss it should be presented in a section identified as relating to
discontinued operations ie, separately from continuing operations. (This analysis is not required where the
discontinued operation is a newly acquired subsidiary that has been classified as held for sale.)
The disclosure of discontinued operations adopted in these Learning Materials is in line with Example 11
in the (non-mandatory) Guidance on Implementing IFRS 5. The main part of the statement of profit or
loss is described as 'continuing operations', with the single amount in respect of 'discontinued
operations' being brought in just above 'profit/(loss) for the year'.

XYZ PLC – Statement of profit or loss for the year ended [date]
£m
Continuing operations
Revenue X
Cost of sales (X)
… …
… …
Share of profits/(losses) of associates X
Profit/(loss) before tax X
Income tax expense (X)
Profit/(loss) for the year from continuing operations X
Discontinued operations (Note Y)
Profit/(loss) for the year from discontinued operations (X)
Profit/(loss) for the year X
Note Y Discontinued operation

During the year the company disposed of its textile division.
Amounts attributable to the division for 20X9 were as follows:
£m
Revenue X
Expenses (X)
Pre-tax profit X
X
Loss recognised on disposal of non-current assets (X)
Income tax X
( X)
In the statement of cash flows, an entity should disclose the net cash flows attributable to the
following activities of discontinued operations:
 Operating
 Investing
 Financing
These disclosures may be presented either in the statement of cash flows or in the notes.
Points to note
1 The results and cash flows for any prior periods shown as comparative figures must be restated to
be consistent with the continuing/discontinued classification in the current period. As an example,
operations discontinued in the year ended 31 December 20X7 will have been presented as
continuing in the 20X6 financial statements but will be re-presented as discontinued in the 20X6
comparative figures included in the 20X7 financial statements.
2 Some narrative descriptions are also required. Although this part of the IFRS does not specifically
mention discontinued operations, it includes them through its requirement for these narratives in
respect of non-current assets disposed of or classified as held for sale; many discontinued
operations will include such non-current assets.
3 If in the current period there are adjustments to be made to operations discontinued in prior
periods, their effect must be shown separately from the figures for operations discontinued in the
current period.
4 If a part of the business is discontinued but it does not meet the criteria for a discontinued
operation (ie, it cannot be clearly distinguished), then its results must be included in those from
continuing operations.
2.6 Presenting discontinued operations: statement of financial position

If the operation has finally been discontinued and all its assets have been disposed of, there will be
nothing relating to the discontinued operation still in the statement of financial position. So there
will be no disclosures required.

If non-current assets held for sale have not been finally disposed of, they must be shown in the
statement of financial position separately from all other assets. In these circumstances there will be a
separate line item immediately below the sub-total for current assets for the non-current assets held
for sale. If an operation is being discontinued, then any non-current assets related to it will now be held
with a view to disposal and it will be inappropriate for them to be shown as non-current assets.
The previous classification is retained for non-current assets being abandoned because, by definition,
they are not held for sale.
Point to note: Any non-current assets now held for sale are not reclassified as held for sale in the
statements of financial position for any prior periods shown as comparative figures.
2.7 Link with other IASs

As has already been noted, the part of IFRS 5 dealt with in this chapter is concerned purely with
disclosure, not about recognition or measurement. But a decision to discontinue an operation would
normally require management to immediately consider the recognition and measurement requirements
of:
 IAS 36, Impairment of Assets (dealt with in Chapter 4) which may require an immediate reduction in
the carrying amount of non-current assets.
 IAS 37, Provisions, Contingent Liabilities and Contingent Assets (dealt with in Chapter 9) which may
require the recognition of provisions for reorganisation and restructuring costs.
It is also the case that, even if a component being disposed of or abandoned has to be treated as a
continuing operation (because it does not meet all of the conditions for being classified as a
discontinued operation), management should still consider whether the requirements of IAS 36 and
IAS 37, together with that of IAS 1 (dealt with in Chapter 2) to make separate disclosure of 'exceptional'
items, should be applied to that continuing operation.
Worked example: Business closure

On 20 October 20X7 the directors of a parent company made a public announcement of plans to close
a steel works. The closure means that the group will no longer carry out this type of operation, which
until recently has represented about 10% of its total revenue. The works will be gradually shut down
over a period of several months, with complete closure expected in July 20X8. At 31 December output
had been significantly reduced and some redundancies had already taken place. The cash flows,
revenues and expenses relating to the steel works can be clearly distinguished from those of the P
subsidiary's other operations. A
R
How should the closure be treated in the financial statements for the year ended 31 December 20X7? T
Solution
Because the steel works is being closed, rather than sold, it cannot be classified as 'held for sale'. In
addition, the steel works is not a discontinued operation. Although at 31 December 20X7 the group was
firmly committed to the closure, this has not yet taken place and therefore the steel works must be
D
included in continuing operations. Information about the planned closure should be disclosed in the
notes to the financial statements.
Interactive question 1: Discontinued operation

The statement of profit or loss for Grey plc for the year ended 31 December 20X7 is as follows:
£
Revenue 300,000
Distribution costs (40,000)
Administrative expenses (90,000)

On 30 September 20X7 the company classified a manufacturing division as held for sale. It satisfies the
definition of a discontinued operation in accordance with IFRS 5.
The results of the division are as follows:
£
Revenue 32,000
Distribution costs (12,000)
Administrative expenses (10,000)
These balances have been included in the statement of profit or loss of Grey plc above.
Requirement
Show how the discontinued operation would be treated in the statement of profit or loss.
Fill in the proforma below.
£
Revenue
Cost of sales
Gross profit
Distribution costs
Administrative expenses
Profit before tax
Income tax expense
Profit for the year from continuing operations
Discontinued operations
Loss for the year from discontinued operations
Profit for the year
WORKING
Continuing Discontinued
operations operations Total
£ £ £
Revenue
Cost of sales
Gross profit
Distribution costs
Administrative expenses
Profit/(loss) from operations
Income tax
Net profit/(loss) for year
3 3 IAS 24, Related Party Disclosures

Section overview
 Disclosure is required of the nature of any related party relationships and of any transactions
between such parties. No disclosure exemptions are permitted for transactions between two or
more members of a group where the subsidiaries are wholly owned.

Interactive question 2: Wholly owned subsidiary
Apple Co owns 100% of Pear Co and 100% of Banana Co. Banana Co sells goods to Pear Co.
Requirements
Explain whether a related party relationship exists between Banana Co and Pear Co and what
disclosures, if any, would be required in the current year financial statements of Banana Co:
(i) Under FRS 102
(ii) Under IAS 24
P
A
R
T


Statement of profit or loss for the year ended 31 December 20X7
£
Revenue (300 – 32) 268,000
Cost of sales (100 – 15) (85,000)
Distribution costs (40 – 12) (28,000)
Administrative expenses (90 – 10) (80,000)
Profit for the year from continuing operations 54,000
Loss for the year from discontinued operations (32 – 15 – 12 – 10) (5,000)
Under UK GAAP, this
WORKING
working alone would Continuing Discontinued
be sufficient operations operations Total
disclosure, as it £ £ £
Revenue already requires the 268,000 32,000 300,000
Cost of sales extra column. (85,000) (15,000) (100,000)
Gross profit 183,000 17,000 200,000
Distribution costs (28,000) (12,000) (40,000)
Administrative expenses (80,000) (10,000) (90,000)
Profit/(loss) before tax 75,000 (5,000) 70,000
Income tax expense (21,000) – (21,000)
Net profit/(loss) for year 54,000 (5,000) 49,000
Under both FRS 102 and IAS 24, a related party relationship exists between Banana Co and Pear Co.
Under both FRS 102 and IAS 24 the transaction must be disclosed in the financial statements of Banana
Co.
IAS 24 requires disclosure of transactions entered into between two or more members of a group. FRS
102 does not require disclosure as long as any subsidiary which is a party to the transaction is wholly
owned by the other party to the transaction. Banana Co is wholly owned by Apple Co, not Pear Co, and
Apple Co is not a party to the transaction. Had Banana sold to Apple, no disclosure would have been
required.

CHAPTER 4
Property, plant and

equipment
Introduction
Topic List
1 Key differences
2 Property, plant and equipment
3 Derecognition of PPE: IFRS 5
57
Introduction
You will have a working knowledge of IAS 16 from the Accounting paper and will have applied it to
straightforward situations and more complex ones in Financial Accounting and Reporting (UK GAAP).
By far the most difference change you need to know about relates to the classification of assets as 'held
for sale' under IFRS 5, for which there is no equivalent in UK GAAP.

2 1 Key differences
Section overview
There are no material differences between FRS 102 and IAS 16.
There is no equivalent standard in UK GAAP to IFRS 5, Non-current Assets held for sale and Discontinued
Operations.
1.1 Property, plant and equipment

IAS 16 has extensive disclosure requirements.
There are no significant differences between FRS 102 and IAS 16, but IFRS 5 requires property, plant and
equipment (tangible fixed assets) which is to be disposed of to be reclassified as 'held for sale' subject to
certain criteria. 'Held for sale' assets are subject to no further depreciation and are separately presented
in the statement of financial position (balance sheet). Under UK GAAP there is no 'held for sale' category
and tangible fixed assets continue to be held as such and depreciated until their ultimate disposal.
 Continuing and discontinued activities must be analysed. Unlike IFRS 5 detailed analysis is shown
on face of the income statement (profit and loss).
 Classification and measurement of assets generally continues as normal without regard for the
disposal. This includes depreciation until the date of disposal. IFRS 5 on the other hand requires
depreciation to cease while a non-current asset is held for sale as well as separate classification.
1.2 Borrowing costs

The difference between FRS 102 and IAS 23 is as follows:
FRS 102 IAS 23

Entities are allowed the choice of whether to Capitalisation is required.
capitalise borrowing costs or to recognise them
as an expense as incurred.
P
1.3 Impairment A
R
CGUs were not examined in the Financial Accounting and Reporting syllabus and so you will study them
T
for the first time under IAS 36 at Advanced Level Corporate Reporting.
2 2 Property, plant and equipment

D
Section overview
IAS 16, Property, Plant and Equipment provides guidance on the accounting treatment of non-current
tangible assets.
2.1 IAS 16 Property, Plant and Equipment

The objective of IAS 16 is to set out in relation to PPE the accounting treatment for the following:
 The recognition of assets
 The determination of their carrying amounts
 The depreciation charges and impairment losses relating to them
This provides the users of financial statements with information about an entity's investment in its PPE
and changes in such investments.
Key differences: 4 Property, plant and equipment 59

There are no material differences between FRS 102 and IAS 16.
IAS 16 should be followed when accounting for PPE unless another IAS or IFRS requires a different
treatment eg, IFRS 5, Non-current Assets Held for Sale and Discontinued Operations. Because the difference
is substantial, in that there is no direct UK equivalent of IFRS 5, the IFRS 5 treatment of assets held for
sale will be new to you, and is covered in full.
1 3 Derecognition of PPE: IFRS 5
Section overview
 When the decision is made to sell a non-current asset it should be classified as 'held for sale'.
 An asset held for sale is valued at the lower of:
– its carrying amount; and
– its fair value less costs to sell.
 No depreciation is charged on a held for sale asset.
3.1 General rule

An item of PPE shall be removed from the statement of financial position (ie, derecognised) when it
is disposed of or when no future economic benefits are expected from its use or disposal (ie, it is
abandoned).
The gain or loss on the disposal of an item of PPE is included in the profit or loss of the period in
which the derecognition occurs. The gain or loss is calculated as the difference between the net sale
proceeds and the carrying amount, whether measured under the cost model or the revaluation model.
Gains may not be included in revenue in the statement of profit or loss.
The process of selling an item of PPE involves the following stages:
 Making the decision to sell the item
 Putting the item on the market, agreeing the selling price and negotiating the contract for sale
 Completing the sale
The issue is at what stage through this process should any gain or loss on the sale be recognised. These
matters are dealt with in IFRS 5 and there are different required treatments depending on whether the
item of PPE is measured under the cost model or the revaluation model.
3.2 Disposal of PPE measured under the cost model

Following the principle that any loss should be recognised immediately but any gain should only be
recognised when it is realised, IFRS 5's requirements in respect of PPE measured under the cost model
are that:
 When the carrying amount of a non-current asset will be recovered principally through sale
(rather than through continuing use), the asset must be classified as held for sale. In most cases,
this classification will be made at the time of the decision to sell.
 A non-current asset held for sale is measured at the lower of:
– its carrying amount; and
– Its fair value less costs to sell (ie, its net selling price).
The effect is that any loss (ie, where the former value exceeds the latter) is recognised at the time
of classification as held for sale. But any gain (ie, where the latter value exceeds the former) is not;
instead it is recognised according to the general rule in Section 9.1 above.
 A non-current asset held for sale is presented separately from all other assets in the statement of
financial position. IFRS 5 does not specify where this 'separate presentation' should be made, but
these learning materials follow the IASB's (non-mandatory) guidance on implementing IFRS 5 by
presenting it immediately below the sub-total for current assets.

 No depreciation is charged on a held for sale asset. The new valuation basis of fair value less costs
to sell approximates to residual value, so there is now no depreciable amount.
 The loss is an impairment loss, dealt with in the same way as other impairment losses under
IAS 36.
On ultimate disposal, any difference between carrying amount and disposal proceeds is treated as a loss
or gain under IAS 16, not as a further impairment loss or reversal of the original impairment loss.
Interactive question 1: Asset held for sale I

An item of PPE was acquired on 1 January 20X5 at a cost of £100,000. A residual value of £10,000 and a
useful life of 10 years was assumed for the purpose of depreciation charges.
On 1 January 20X8 the asset was classified as held for sale. Its fair value was estimated at £40,000 and
the costs to sell at £2,000.
The asset was sold on 30 June 20X8 for £38,000.
Requirements
(a) Show an extract from the PPE table for 20X8 relating to the asset held for sale.
(b) Show the journal entry to record the classification as held for sale.
(c) Show the entry in the statement of profit or loss for the year ended 31 December 20X8.
(d) Describe how the answer to (c) would change if the sales proceeds on 30 June 20X8 were
£32,000.
(a) Note showing movements on PPE (extract)
£
Cost or valuation:
At 1 January 20X8
Classified as held for sale
At 31 December 20X8
Depreciation:
At 1 January 20X8
Impairment loss
P
Classified as held for sale
A
At 31 December 20X8 R
(b) Journal entries to record the classification as held for sale T
Recognising the impairment

£ £
DR Profit or loss
CR PPE – accumulated depreciation
D
(This is shown as an impairment loss in the PPE table)
Classification as held for sale
£ £
DR Non-current assets held for sale
DR PPE – accumulated depreciation
CR PPE – cost
(c) Statement of profit or loss for the year ended 31 December 20X8
£
Impairment loss on reclassification of non-current asset as held for sale

(d) Statement of profit or loss for the year ended 31 December 20X8
In the statement of profit or loss:
(1)
(2)
Interactive question 2: Asset held for sale II

These facts are as detailed in Interactive question 1, except that on classification as held for sale, the fair
value was estimated at £80,000 and the costs to sell at £3,000.
The asset was sold on 30 June 20X8 for £77,000.
Requirements
(a) Show the journal entry to record the classification as held for sale.
(b) Show the entry in the statement of profit or loss for the year ended 31 December 20X8.
(a) Journal entry to record the classification as held for sale
£ £
1 January 20X8
DR Non-current assets held for sale
CR PPE – cost
(b) Statement of profit or loss for the year ended 31 December 20X8
£
Gain on disposal of non-current assets held for sale
3.3 Classification as held for sale

For the classification as held for sale to be made detailed criteria must be met:
 The asset must be available for immediate sale in its present condition.
 Its sale must be highly probable (ie, significantly more likely than probable).
For the sale to be highly probable:
 Management must be committed to a plan to sell the asset.
 There must be an active programme to locate a buyer.
 The asset must be marketed for sale at a price that is reasonable in relation to its current fair
value.
 The sale should be expected to take place within one year from the date of classification.
 It is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
Points to note
1 An asset can still be classified as held for sale, even if the sale has not actually taken place within
one year. However, the delay must have been caused by events or circumstances beyond the
entity's control and there must be sufficient evidence that the entity is still committed to sell the
asset.

2 If the end of a reporting period intervenes between the classification as held for sale and the final
disposal, fair value less costs to sell may have fallen below or risen above the figure used on original
classification. Any fall is accounted for as a further impairment loss, while any rise goes to reduce
the amount of the original impairment loss, but cannot write the asset's carrying amount above
its original level.
3 The rules for disposal groups (where an operation comprising assets and liabilities is being sold) fall
outside the Financial Accounting and Reporting syllabus and will be studied for the first time at
Advanced Level Corporate Reporting.
Interactive question 3: Disposal of revalued PPE

Land, which is not depreciated, was acquired on 1 January 20X2 at a cost of £200,000 and revalued to
£250,000 on 1 January 20X5. On 1 January 20X8 the asset was classified as held for sale. Its fair value
was estimated at £235,000 and the costs to sell at £5,000.
Requirements
(a) Show the journal entry to record the revaluation on 1 January 20X5.
(b) Show the journal entry to record the classification as held for sale on 1 January 20X8.
(a) Journal entry to record the revaluation
£ £
1 January 20X5
DR PPE – at valuation
CR Revaluation surplus
(b) Journal entry to record the classification as held for sale
£ £
1 January 20X8
DR Non-current assets held for sale – fair value less costs to sell
DR Profit or loss – costs to sell
DR Revaluation surplus
CR PPE – at valuation
P
A
Interactive question 4: Summary R
T
On 1 January 20X1, Tiger Ltd buys for £120,000 an item of property, plant and equipment which has
an estimated useful life of 20 years with no residual value. Tiger Ltd depreciates its non-current assets on
a straight-line basis. Tiger Ltd's year-end is 31 December.
On 31 December 20X3, the asset will be carried in the statement of financial position as follows:
£ D
Property, plant and equipment at cost 120,000
Accumulated depreciation (3  (120,000 ÷ 20)) (18,000)
102,000
On 1 January 20X4, the asset is revalued to £136,000. The total useful life remains unchanged.
On 1 January 20X8 the asset is classified as held for sale, its fair value being £140,000 and its costs to sell
£3,000. On 1 May 20X8 the asset is sold for £137,000.
Requirements
(a) Show the journal to record the revaluation.
(b) Calculate the revised depreciation charge and show how it would be accounted for, including any
permitted reserve transfers.
(c) Show the journal to record the classification as held for sale.
(d) Explain how these events will be recorded in the financial statements for the year ended
31 December 20X8.

(a) Journal to record the revaluation
1 January 20X4 £ £
DR PPE cost/valuation
DR PPE accumulated depreciation
CR Revaluation surplus
(b) Revised depreciation charge
Annual charge from 20X4 onwards £ £
DR Profit or loss depreciation expense
CR PPE accumulated depreciation
Annual reserve transfer

DR Revaluation surplus
CR Retained earnings
Being the difference between the actual depreciation charge and the charge based on historical
cost.
Shown in the statement of changes in equity as follows:
Revaluation Retained
surplus earnings
£ £
Brought forward X X
Profit for the year – X
Transfer of realised profits
Carried forward X X
(c) Journal to record classification as held for sale

At 1 January 20X8, balances relating to the asset will be as follows:
£
Property, plant and equipment at valuation
Accumulated depreciation
Carrying amount
Revaluation surplus
£ £
1 January 20X8
DR Non-current assets held for sale – fair value less costs to sell
DR Profit or loss – costs to sell
CR PPE – cost/valuation
CR Revaluation surplus (ß)
(d) Financial statements for the year ended 31 December 20X8

(1)
(2)
In the statement of profit or loss and other comprehensive income:

Remaining balance on revaluation surplus is transferred to retained earnings as a reserve transfer in
the statement of changes in equity:
surplus earnings
£ £
Brought forward X X
Retained profit for the year – X
Transfer of realised profits
Carried forward X X
P
A
R
T


(a) Note showing movements on PPE (extract)
£
Cost or valuation:
At 1 January 20X8 100,000
Classified as held for sale (100,000)
At 31 December 20X8 –
Depreciation:
At 1 January 20X8 ((100,000 – 10,000)  3/10) 27,000
Impairment loss 35,000
Classified as held for sale (62,000)
At 31 December 20X8 –
(b) Journal entries to record the classification as held for sale

Recognising the impairment
£ £
DR Profit or loss 35,000
CR PPE – accumulated depreciation 35,000
Classification as held for sale
£ £
DR Non-current assets held for sale 38,000
DR PPE – accumulated depreciation 62,000
CR PPE – cost 100,000
(c) Statement of profit or loss for the year ended 31 December 20X8
£
Impairment loss on reclassification of non-current assets held for sale
((100,000 – 27,000) – 38,000) 35,000
(d) Statement of profit or loss for the year ended 31 December 20X8
With sales proceeds of £32,000
(1) The impairment loss would remain the same
(2) A loss on disposal of £6,000 (38,000 – 32,000) would be included

(a) Journal entry to record the classification as held for sale
£ £
1 January 20X8
DR PPE – accumulated depreciation (30%  (100,000 – 10,000)) 27,000
DR Non-current assets held for sale () 73,000
CR PPE – cost 100,000
As fair value less costs of disposal is greater than carrying amount, there is no impairment loss at
the time of classification.
(b) Statement of profit or loss for the year ended 31 December 20X8
£
Gain on disposal of non-current assets held for sale (77,000 – 73,000) 4,000

(a) Journal entry to record the revaluation
£ £
1 January 20X5
DR PPE – at valuation 50,000
CR Revaluation surplus 50,000
(b) Journal entry to record the classification as held for sale

£ £
1 January 20X8
DR Non-current assets held for sale – FV less costs of disposal (235 – 5) 230,000
DR Profit or loss – costs of disposal 5,000
DR Revaluation surplus (250 – 235) 15,000
CR PPE – at valuation 250,000

(a) Journal to record the revaluation
£ £
1 January 20X4
DR PPE cost/valuation (136,000 – 120,000) 16,000
DR PPE accumulated depreciation 18,000
CR Revaluation surplus (136,000 – 102,000) 34,000
(b) Revised depreciation charge

Annual charge from 20X4 onwards
£ £
DR Profit or loss – depreciation expense (136,000 ÷ 17) 8,000
CR PPE accumulated depreciation 8,000
Annual reserve transfer
DR Revaluation surplus 2,000
CR Retained earnings 2,000
Being the difference between the actual depreciation charge and the charge based on historical
cost (£6,000).
Shown in the statement of changes in equity as follows:
surplus earnings P
£ £ A
Brought forward X X R
T
Profit for the year – X
Transfer of realised profits (2,000) 2,000
Carried forward X X
(c) Journal to record classification as held for sale

At 1 January 20X8, balances relating to the asset will be as follows: D
£
Property, plant and equipment at valuation 136,000
Accumulated depreciation (4  8,000) (32,000)
Carrying amount 104,000
Revaluation surplus (34,000 – (4  2,000)) 26,000
£ £
1 January 20X8
DR PPE – accumulated depreciation 32,000
DR Non-current assets held for sale – fair value less costs of disposal 137,000
DR Profit or loss – costs of disposal 3,000
CR PPE – cost/valuation 136,000
CR Revaluation surplus (ß) 36,000
172,000 172,000

(d) Financial statements for the year ended 31 December 20X8
(1) a charge of £3,000 will be made for the costs of disposal, classified as an impairment loss; and
(2) no profit or loss on disposal will be shown, as the asset is sold for its fair value less costs to sell.
In the statement of profit or loss and other comprehensive income:
The revaluation surplus arising from the classification as held for sale will be recognised:
£
Profit for the year X
Gain on property revaluation 36,000
Total comprehensive income X
Remaining balance on revaluation surplus is transferred to retained earnings as a reserve transfer in

the statement of changes in equity:
surplus earnings
£ £
Brought forward X X
Retained profit for the year – X
Transfer of realised profits (26 + 36) (62,000) 62,000
Carried forward X X

CHAPTER 5
Intangible assets
Introduction
Topic List
1 Key differences
2 Initial recognition and measurement
3 Internally generated assets
4 Measurement of intangible assets after recognition
5 Disclosure
6 Goodwill
69
Introduction
In the Accounting paper you will have had an introduction to accounting for intangible assets. This
knowledge and application was developed in the Financial Accounting and Reporting paper (UK GAAP),
and the IFRS equivalent will be assumed knowledge for Advanced Level Corporate Reporting.
In general, IAS 38 is more restrictive than FRS 102 Section 18.

1 1 Key differences
Section overview
 FRS 102 differs from IAS 38 in a number of respects.
FRS 102 and IAS 38 can be compared as follows:

 IAS 38 requires all eligible development costs to be capitalised. Under FRS 102 an entity can choose
whether or not to capitalise development costs.
 Under IFRS intangible assets can have an indefinite life. FRS 102 treats all intangible fixed assets as
having a finite useful life over which they should be amortised. If it is not possible to reliably
estimate the useful life, then it should not exceed ten years.
IAS 38 requires the disclosure of a reconciliation of carrying amounts (net book value) of intangible
assets at the beginning and end of the period when presenting comparative information.
2 2 Initial recognition and measurement
Section overview
 An intangible asset should be recognised if:
– it is probable that future economic benefits from the asset will flow to the entity; and
– the cost of the asset can be measured reliably.
 At recognition the intangible should be recognised at cost.
 Separately acquired intangibles and intangibles acquired as part of a business combination are
normally considered to meet the recognition criteria of IAS 38.
 An intangible asset acquired in a business combination should be recognised when it arises from
legal or other contractual rights even if there is no history or evidence of exchange transactions for
the same or similar assets and otherwise estimating fair value would be dependent on
immeasurable variables. This is different from FRS 102.
P
 An intangible asset acquired as part of a business combination should be recognised at fair value. A
The definition of fair value is different from that in FRS 102. R
T
2.1 Recognition: basic principle

An item should only be recognised as an intangible asset if economic benefits are expected to flow in
the future from ownership of the asset. Economic benefits may result in increased revenue, but may also
D
result in the reduction of costs (cost savings).
An intangible asset should be recognised if, and only if, both the following occur:
 It is probable that the future economic benefits that are attributable to the asset will flow to the
entity.
 The cost can be measured reliably.
Management has to exercise judgement in assessing the degree of certainty attached to the flow of
economic benefits to the entity, giving greater weight to external evidence.
An intangible asset should initially be measured at its cost.
This is the same as FRS 102.
Key differences: 5 Intangible assets 71

2.2 Subsequent expenditure
Subsequent expenditure should rarely be recognised in the carrying amount of an asset. This is
because in most cases the expenditure is incurred to maintain the expected future economic benefits
embodied in an existing asset. In addition it is often difficult to attribute subsequent expenditure directly
to a particular intangible asset rather than to the business as a whole.
This is the same as FRS 102
2.3 Separately acquired intangible assets

In most cases, separately acquired intangibles satisfy the IAS 38 recognition criteria, just as they
satisfy the FRS 102 Section 18 criteria.
2.4 Intangible assets acquired as part of a business combination

When an entity purchases another business entity the consideration given will normally exceed the value
of the individual assets and liabilities bought. This excess is normally referred to as goodwill.
The Illustrative Examples in IFRS 3 (Revised), Business Combinations include a list of items acquired in a
business combination that should be recognised as intangible assets separately from goodwill, under
five headings:
 Marketing-related intangible assets, such as trademarks
 Customer-related intangible assets, such as customer lists
 Artistic-related intangible assets, such as motion picture films
 Contract-based intangible assets, such as franchise agreements
 Technology-based intangible assets, such as computer software
The effect of recognising these intangible assets is to reduce to a minimum the amount ascribed to the
goodwill acquired in a business combination.
Intangible assets acquired as part of a business combination are normally considered to meet the
recognition criteria of IAS 38. The cost of an intangible asset acquired as part of a business
combination should be measured at its fair value at the date it was acquired.
The definition of fair value is different from that in FRS 102, Section 18.
Definition
Fair value: The price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
Fair value may be observable from an active market or recent similar transactions. Other methods may
also be used. If fair value cannot be ascertained reliably, then the asset has failed to meet the
recognition criteria. In this situation no separate intangible asset would be recognised, resulting in an
increase in the value of goodwill acquired in the business combination.
2.5 Recognition of an expense

Expenditure on intangibles should be recognised as an expense unless:
 it is part of the cost of an asset which meets the recognition criteria; or
 it arises in a business combination but cannot be recognised as an asset. (This will form part of the
goodwill arising at the acquisition date.)
Examples of expenditure which should be treated as an expense include the following:
 Start-up costs
 Training costs
 Advertising and promotional costs
 Business relocation and reorganisation costs

1 3 Internally generated assets
Section overview
 Internally generated goodwill should not be recognised, as per FRS 102.
 Expenditure incurred in the research phase should be expensed as incurred, as per FRS 102.
 Expenditure incurred in the development phase must be recognised as an intangible asset
provided certain criteria are met. This is different from FRS 102.
 IAS 38, like FRS 102 prohibits the recognition of internally generated brands.
 If recognised, internally generated assets should be measured at cost.
3.1 Recognition of internally generated assets

Internally generated goodwill should not be recognised as an asset.
3.2 Research phase

All expenditure that arises in the research phase should be recognised as an expense when it is
incurred. No costs should be recognised as an intangible asset. The rationale for this treatment is that at
this stage there is insufficient certainty that the expenditure will generate future economic benefits.
Examples of research costs include the following:
 Activities aimed at obtaining new knowledge
 The search for, evaluation and final selection of applications of research findings or other
knowledge
 The search for alternatives for materials, devices, products, processes, systems or services
 The formulation, design, evaluation and final selection of possible alternatives for new or improved
materials, devices, products, processes, systems or services
3.3 Development phase

Development costs should be recognised as intangible assets provided that the entity can demonstrate P
A
that all the following strict criteria are met: R
 The technical feasibility of completing the intangible asset so that it will be available for use or sale. T
 The intention to complete the intangible asset and use or sell it.
 The ability to use or sell the intangible asset.
 How the intangible asset will generate probable future economic benefits. Among other things, the
entity should demonstrate the existence of a market for the output of the intangible asset or the D
intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset.
 The availability of adequate technical, financial and other resources to complete the development
and to use or sell the intangible asset.
 Its ability to measure reliably the expenditure attributable to the intangible asset during its
development.
If the above conditions are met development expenditure must be capitalised. This is a key difference
from UK GAAP, which gives a choice.
In contrast with research costs, development costs are incurred at a later stage in a project, and the
probability of success should be more apparent. Examples of development costs include the following.
 The design, construction and testing of pre-production or pre-use prototypes and models
 The design of tools, jigs, moulds and dies involving new technology

 The design, construction and operation of a pilot plant that is not of a scale economically feasible
for commercial production
 The design, construction and testing of a chosen alternative for new or improved materials,
devices, products, processes, systems or services
3.4 Other internally generated intangible assets

The standard prohibits the recognition of internally generated brands, mastheads, publishing titles
and customer lists and similar items as intangible assets. The reason for this is that these costs cannot be
identified separately from the cost of developing the business as a whole.
3.5 Cost of an internally generated intangible asset

If an internally generated intangible asset is recognised it should be measured at cost. The costs
allocated to an internally generated intangible asset should be only costs that can be directly attributed
or allocated on a reasonable and consistent basis to creating, producing or preparing the asset for its
intended use. Such costs include:
 materials and services consumed
 employment costs of those directly engaged in generating the asset
 legal and patent or licence registration fees
The principles underlying the costs that should or should not be included are similar to those for other
non-current assets and inventory.
The cost of an internally generated intangible asset is the sum of the expenditure incurred from the
date when the intangible asset first meets the recognition criteria. If, as often happens, considerable
costs have already been recognised as expenses before management can demonstrate that the criteria
have been met, this earlier expenditure should not be retrospectively recognised at a later date as
part of the cost of an intangible asset.
Worked example: Treatment of expenditure

Douglas Ltd is developing a new production process. During 20X7, expenditure incurred was £100,000,
of which £90,000 was incurred before 1 December 20X7 and £10,000 between 1 December 20X7 and
31 December 20X7. Douglas Ltd can demonstrate that, at 1 December 20X7, the production process
met the criteria for recognition as an intangible asset. The recoverable amount of the know-how
embodied in the process is estimated to be £50,000.
How should the expenditure be treated?
Solution
At the end of 20X7, the production process must be recognised as an intangible asset at a cost of
£10,000. This is the expenditure incurred since the date when the recognition criteria were met, that is,
1 December 20X7. The £90,000 expenditure incurred before 1 December 20X7 is expensed, because
the recognition criteria were not met. It will never form part of the cost of the production process
recognised in the statement of financial position.
This answer is identical to its equivalent in the UK GAAP Study Manual, except the latter says the
expenditure may be recognised as an intangible asset.

1 4 Measurement of intangible assets after recognition
Section overview
 After initial recognition an entity can choose between two models, as in FRS 102:
– The cost model
– The revaluation model
 In practice, few intangible assets are revalued.
 An intangible asset with a finite useful life should be amortised over this period, as per FRS 102.
 An intangible asset with an indefinite useful life should not be amortised. This is different from
FRS 102.
4.1 Cost model

The standard allows two methods of measuring intangible assets after they have been first recognised.
Applying the cost model, an intangible asset should be carried at its cost, less any accumulated
amortisation and any accumulated impairment losses.
4.2 Revaluation model

The revaluation model requires an intangible asset to be carried at a revalued amount, which is its fair
value at the date of revaluation, less any subsequent accumulated amortisation and any subsequent
accumulated impairment losses.
4.3 Useful life

Under both measurement models an entity should assess the useful life of an intangible asset, which
may be finite or indefinite. An intangible asset has an indefinite useful life when there is no
foreseeable limit to the period over which the asset is expected to generate net cash inflows for the
entity.
Under FRS 102 the useful life will always be finite. If an entity cannot make a reliable estimate of the
useful life of an intangible fixed asset, the life should not exceed ten years. P
A
R
4.4 Amortisation period and amortisation method T
An intangible asset with a finite useful life should be amortised over its expected useful life.
 Amortisation should start when the asset is available for use, as per FRS 102.
 Amortisation should cease at the earlier of the date that the asset is classified as held for sale in
accordance with IFRS 5, Non-current Assets Held for Sale and Discontinued Operations and the date D
that the asset is derecognised.
This is different from FRS 102, in that FRS 102 does not have the category of held for sale,
there being no equivalent of IFRS 5.
 The amortisation method used should reflect the pattern in which the asset's future economic
benefits are consumed. If such a pattern cannot be predicted reliably, the straight-line method
should be used, as per FRS 102.
 The amortisation charge for each period should normally be recognised in profit or loss, as per
FRS 102.
The residual value of an intangible asset with a finite useful life should be assumed to be zero unless a
third party is committed to buying the intangible asset at the end of its useful life or unless there is an
active market for that type of asset (so that its expected residual value can be measured) and it is
probable that there will be a market for the asset at the end of its useful life.

The amortisation period and the amortisation method used for an intangible asset with a finite useful life
should be reviewed at each financial year end.
This is different from FRS 102, under which the amortisation period and the amortisation method
used for an intangible fixed asset should be reviewed when there are indications, such as changes in
market prices or technological advances, that useful life or residual value may have changed.
4.5 Intangible assets with indefinite useful lives

An intangible asset with an indefinite useful life should not be amortised. Instead the asset should be
reviewed annually to assess whether there has been a fall in its value in accordance with IAS 36,
Impairment of Assets.
As stated above, under FRS 102 the useful life is always finite.
2 5 Disclosure
Section overview
IAS 38 requires detailed disclosures:
 for each class of intangible asset; and
 for intangibles accounted for at revalued amounts.
5.1 Disclosure requirements

The standard has fairly extensive disclosure requirements for intangible assets. The financial statements
should disclose the accounting policies for intangible assets that have been adopted.
Below are listed only those disclosures which are different under IFRS and UK GAAP:
 FRS 102 requires disclosure of the original fair value and current net book value of any intangible
fixed assets acquired by way of a grant and initially recognised at fair value. IFRS 38 does not.
Under IFRS, if an intangible asset is acquired by way of a grant, the intangible asset may be
recognised at either fair value or at the nominal value of the grant.
 In the case of intangible assets that are assessed as having an indefinite useful life, the carrying
amounts and the reasons supporting the assessment of an indefinite useful life. This does not apply
under FRS 102 because the useful life is always finite.
 IAS 38 requires the disclosure of a reconciliation of carrying amounts (net book value) of intangible
assets at the beginning and end of the period when presenting comparative information.
The following interactive question is for revision purposes only, as the areas it tests are the same under
both IFRS and UK GAAP, except in one small point.
Interactive question: Intangible assets

In preparing its accounts for the year ended 30 June 20X7 NS plc has to deal with a number of matters.
(1) An advertising campaign has just been completed at a cost of £1.5 million. The directors
authorised this campaign on the basis of the evidence from NS plc's advertising agency that it
would create £4 million of additional profits over the next two years.
(2) A staff training programme has been carried out at a cost of £250,000, the training consultants
having demonstrated to the directors that the additional profits to the business over the next
12 months will be £400,000.
(3) A new product has been developed during the year. The expenditure totals £1.2 million, of which
£750,000 was incurred before 31 December 20X6, the date on which it became clear the product
was technically feasible. The new product will be launched in the next three months and its
recoverable amount is estimated at £600,000.

Requirement
Calculate the amounts which will appear as assets in NS plc's statement of financial position at 30 June 20X7.
The treatment in NS plc's statement of financial position at 30 June 20X7 should be as follows:
(1) Advertising campaign:
.........................................................................................................................................................
.........................................................................................................................................................
(2) Staff training programme:

.........................................................................................................................................................
.........................................................................................................................................................
(3) New product:
.........................................................................................................................................................
.........................................................................................................................................................
The UK equivalent question stated in Part (3) that NS plc intended to capitalise the development costs.
Why?
See Answer at the end of the chapter.
6 Goodwill
Section overview
 Internally generated goodwill should not be recognised, as with FRS 102.
 Acquired goodwill should be recognised, as with FRS 102.
 Acquired goodwill should not be amortised but is tested for impairment at least annually.
P
A
6.1 What is goodwill? R
Goodwill can be thought of as being the excess of the value of a business over the sum of its identifiable T
net assets. It can be created in many different ways, such as by good relationships between a business
and its customers. It has no objective valuation and so internally generated goodwill should not be
recognised as an asset.
D
6.2 Purchased goodwill
There is one exception to the general rule that goodwill has no objective valuation. This is when a
business is acquired. Purchased goodwill is shown in the acquirer's statement of financial position
because it has been paid for. It has no tangible substance, and so it is an intangible non-current asset.
Point to note: At this stage we are referring to goodwill arising on the acquisition of an
unincorporated business. Goodwill arising on the acquisition of companies is reported in consolidated
financial statements, which will be dealt with in a later chapter.
6.3 Subsequent measurement of purchased goodwill

FRS 102 required that purchased goodwill should be amortised over its useful life. If the useful life
cannot be reliably measured then the assumption is that it should not exceed ten years. Under IFRS,
acquired goodwill should not be amortised but is tested for impairment at least annually.


The treatment in NS plc's statement of financial position at 30 June 20X7 should be as follows:
(1) Advertising campaign: no asset should be recognised, because it is not possible to identify future
economic benefits that are attributable only to this campaign. The whole expenditure should be
recognised in profit or loss.
(2) Staff training programme: no asset should be recognised, because staff are not under the control of
NS plc and when staff leave, the benefits of the training, whatever they may be, also leave. The
whole expenditure should be recognised in profit or loss.
(3) New product: the development expenditure appearing in the statement of financial position
should be measured at £450,000.
The expenditure before the date on which the product becomes technically feasible should be
recognised in profit or loss. The remaining £450,000 is less than the recoverable amount, so no
impairment issues arise.
In the UK equivalent question, it was necessary to state the directors' intentions regarding capitalisation
of development costs, because the company had a choice.

CHAPTER 6
Revenue and inventories
Introduction
Topic List
1 Key differences
79
Introduction
There are no significant differences regarding revenue or inventories (stocks) apart from terminology,
and the fact that IFRS does not use the word 'turnover'. Such differences as there are relate to lack of
guidance in IFRS, so there isn't anything new to learn.
You should be aware, however, that the Corporate Reporting paper deals with current issues, among
them the recent standard IFRS 15, Revenue from Contracts with Customers. While FRS 102 is virtually the
same as IAS 18, Revenue, IFRS 15 is very different.

1 Key differences
Section overview
There are minor differences between IFRS and UK GAAP treatment of inventories (stocks).
There are no significant differences between IAS 18 and FRS 102.

Differences between IAS 2 and FRS 102 are as follows:
 FRS 102 requires stocks held for distribution at no or nominal consideration, or through a non-
exchange transaction, to be measured at adjusted cost. IAS 2 includes no such requirement.
 IAS 2 provides no guidance on the reversal of impairment losses on inventory. Under FRS 102
impairment losses on stock can be reversed if the circumstances which led to the impairment no
longer exist, or if economic circumstances change.
P
A
R
T
Key differences: 6 Revenue and inventories 81

CHAPTER 7
Leases
Introduction
Topic List
1 Key differences
2 Disclosure
3 Land and buildings
4 IFRS 16, Leases
83
Introduction
The differences between UK GAAP and IFRS with regard to leasing are not significant.
You should be aware, however, that the Corporate Reporting paper deals with current issues, among
them the recent standard IFRS 16, Leases. While FRS 102 is very similar to the current standard IAS 17,
Leases, IFRS 16, is very different. In addition, early adoption is possible for IFRS 16, but only if IFRS 15,
Revenue from Contracts with Customers is adopted early, as the two standards interact.

2 1 Key differences
Section overview
There are no significant differences between IAS 17 Leases and FRS 102.
IAS 17 has more detailed disclosures requirements compared to FRS 102. However these are not
covered in FAR (IFRS), so are not assumed knowledge for Advanced Level Corporate Reporting.
IAS 17 refers specifically to land and buildings and, following an amendment in 2009, long leases of
land can be classified as finance leases if they meet the criteria.
FRS 102 is silent on leases of land and buildings, but the convention whereby leases of land are treated
as operating leases can be expected to apply.
3 2 Disclosure
Section overview
IAS 17 has more extensive disclosures than FRS 102, but these were not covered in FAR (IFRS) and so
are not assumed knowledge at Advanced Level. Below is a quick reminder of material you have
covered, different only in the references to standards.
2.1 Finance lease liability

The liability at each reporting date needs to be split between:
 the current liability; and
 the non-current liability.
Point to note: The non-current liability will comprise only capital outstanding. No interest will be
included as any interest due at the end of the next year will not yet have accrued.
The steps to split the liability are therefore:
Step 1
P
Identify the capital balance remaining in one year's time. (This can be found in the lease calculation A
table.) R
T
Step 2
Deduct the capital balance remaining in one year's time from the total liability at the end of the
reporting period. This will give the amount due within one year as a balancing figure.
2.2 Other disclosures D
Point to note: The leased assets and lease liabilities may not be netted off against each other.
Non-current assets
 Disclosure must be made of the carrying amount of assets held under finance leases as follows:
'Of the total carrying amount of £X, £Y relates to assets held under finance leases.'
 All other IAS 16, Property, Plant and Equipment disclosures are required, together with IAS 36
impairment tests.
Key differences: 7 Leases 85

Liabilities
 Finance lease liabilities must be split between their current and non-current components.
 IAS 17 also requires disclosure of future lease payments, split between amounts due:
– within one year
– within two to five years
– after more than five years
This disclosure can be given either:
 On a gross basis ie, showing gross future lease payments for each of the three categories, then
deducting as a single figure the future periods' finance charges to arrive at the net figure included
in liabilities.
 On a net basis, ie, excluding from each of the three categories the finance charges allocated to
Other disclosures
 In the case of most entities, the IAS 1, Presentation of Financial Statements requirement to disclose
significant accounting policies would result in the disclosure of the policy in respect of finance
leases.
 IAS 17 requires a general description of material leasing arrangements to be included.
1 3 Land and buildings
Section overview
When dealing with a lease of land and buildings, the land and buildings elements need to be
considered separately.
Leases of land and buildings are classified as operating or finance leases in the same way as the leases
of other assets. However due to the differing characteristics of land and buildings IAS 17 requires that
the land and buildings elements of a single lease are considered separately for classification
purposes.
Land A characteristic of land is that it normally has an indefinite economic life. As a result,
paragraphs 14 and 15 of IAS 17 originally stated that a lease of land should be treated as
an operating lease unless title is expected to pass at the end of the lease term. This is the
position under FRS 102, which you will have learned in your UK GAAP FAR studies.
The IASB reconsidered this and decided that in substance, for instance in a long lease of
land and buildings, the risks and rewards of ownership do pass to the lessee regardless of
transfer of title. An amendment was issued in 2009 cancelling paragraphs 14 and 15, so
that a lease of land can be regarded as a finance lease if it meets the existing
criteria. This is different from FRS 102.
Buildings A lease of a building may be treated as a finance lease depending on the full terms of
the lease.
Problem Solution
If you are not told, how do you work out how Work out the relative fair values of the leasehold
much of the minimum lease payments to allocate interests at the inception of the lease, and split the
to buildings and how much to land? payment according to these proportions.
What happens if you cannot allocate the minimum Treat everything as a finance lease (unless clear
lease payments between land and buildings? that both elements are operating leases).
What happens if the land is immaterial? Treat everything as buildings.

Worked example 1: Lease of land and buildings
Amber Ltd entered into a 40-year lease for land and buildings on 1 January 20X7. The following
information is available:
Lease payments: £60,000 pa made annually in advance
Fair value of the leasehold interest: £600,000 of which £50,000 relates to land
Interest rate implicit in the lease: 10%
Present value of the minimum lease
payments in respect of buildings: £591,633
Present value of the minimum lease
payments in respect of land: £53,785
Under IAS 17 the land and buildings element are considered separately. This is a relatively long lease
and in both cases the present value of the minimum lease payments amounts to 'substantially all' of the
fair value of the asset.
It will therefore be correct to treat the whole lease as a finance lease, combined for land and buildings.
In this case, as the present value of the minimum lease payments is above fair value, the lease is
capitalised at fair value.
The £60,000 will be treated as a repayment of a finance lease as follows:
B/f Payment Capital Interest @ 10% C/f
£ £ £ £ £
20X7 600,000 (60,000) 540,000 54,000 594,000
20X8 594,000 (60,000) 534,000 53,400 587,400
At 31 December 20X7 interest of £54,000 will be charged to profit or loss. The liability of £594,000 will
be disclosed in the statement of financial position split between the current element of £60,000 and the
non-current element of £534,000.
As payments are in advance, they are made before any interest has accrued, so the amount due of
£60,000 is treated as a wholly capital element.
Note that the land and buildings will appear separately under property, plant and equipment, as only
the buildings will be depreciated.
Worked example 2: Lease of land and buildings

Opal Ltd entered into a 20-year lease for land and buildings on 1 January 20X7. P
The following information is available: A
R
Lease payments: £37,000 paid annually in arrears – £32,000 in T
respect of buildings and £5,000 in respect of land
Interest rate implicit in the lease: 10%
Fair value of leasehold interest: Land £100,000
Buildings £300,000
Present value of minimum lease payments: Land £42,550 D
Buildings £272,320
In this case, the fair value of the minimum lease payments amounts to substantially all of the fair value in
respect of the buildings. This is not the case in respect of the land.
It will therefore be correct to treat the buildings lease as a finance lease and the land lease as an
operating lease.
The finance lease will be accounted for as follows:
B/f Interest 10% Payment C/f
£ £ £ £
20X7 272,320 27,232 (32,000) 267,552
20X8 267,552 26,755 (32,000) 262,307

At 31 December 20X7 the finance cost of £27,232 will be charged to profit or loss. The liability of
£267,552 will be presented as a current liability of £5,245 (267,552 – 262,307) and a non-current
liability of £262,307.
The land lease payment of £5,000 will be charged to profit or loss.
Interactive question: Land and buildings

On 1 January 20X8 an entity acquired a land and buildings lease with a term of 30 years at an annual
rental of £50,000 payable in advance. Other details of the lease were as follows:
 The lease is renewable at the end of the lease term at a reduced rent.
 The interest rate implicit in the lease was 7.5% and the present value of £50,000 pa payable in
advance over 30 years is £630,000.
 The fair value of the leasehold interest was £660,000, of which £66,000 is attributable to the land
element.
Requirement
Calculate the amounts to be recognised in the entity's statement of profit or loss for the year ended
31 December 20X8 and its statement of financial position at that date.
3 4 IFRS 16, Leases
Section overview
IFRS 16 brings all leases onto the statement of financial position. It is examinable as a current issue in
Corporate Reporting, but not brought forward knowledge.
4.1 IFRS 16, Leases

In January 2016 the IASB issued IFRS 16 Leases. IFRS 16 abolishes the distinction whereby finance leases
were reported on-balance sheet and operating leases were kept off-balance sheet. The different
treatment for different types of lease made it difficult for users to assess an entity's true leasing liabilities.
IFRS 16 introduces a 'right of use' model under which lessees will recognise an asset reflecting their right
to use the leased asset for the lease term and a lease liability reflecting their obligation to make lease
payments. Both the asset and the liability will therefore be recognised on-balance sheet at the
commencement of the lease if the 'right of use' criteria are met.
IFRS 16 is effective from 1 January 2019 and so was not examinable in Financial Accounting
and Reporting (IFRS). However, it will be examinable as a current issue in Advanced Level Corporate
Reporting, and will mean that UK GAAP and IFRS diverge until UK GAAP catches up.

The land and buildings elements should be measured by reference to the fair value of the leasehold
interests, so:
 £66,000 (which is 10% of £660,000) is allocated to the land
 £594,000 (the 90% remainder) is allocated to the buildings
In the case of both the land and the buildings the present value of the minimum lease payments
amounts to substantially all of the fair value of the asset. Also, this lease is renewable at a reduced rent,
suggesting that both elements should be treated as finance leases.
 The land: the lower of the £66,000 fair value allocated to the land and £63,000 (£630,000 × 10%)
present value of minimum lease payments is recognised as a non-current asset and as a liability.
 The building: the lower of the £594,000 fair value allocated to the building and the £567,000
(£630,000 × 90%) present value of the minimum lease payments so allocated should be
recognised as a non-current asset and as a liability.
Statement of profit or loss £

Depreciation (567/30) 18,900
Finance cost (W) 43,500
Statement of financial position

Property, plant and equipment
Cost (567,000 + 63,000) 630,000
Depreciation (18,900)
611,100
Finance lease obligations (W) 573,500
Current liabilities
Finance lease obligations (W) 50,000 P
A
WORKING R
Lease Finance T
Balance payment Balance cost at 7.5% Balance
£ £ £ £ £
20X8 630,000 (50,000) 580,000 43,500 623,500
20X9 623,500 (50,000) 573,500 43,013 616,513

CHAPTER 8
Financial instruments
Introduction
Topic List
1 Key differences
2 Financial instruments – introduction and revision
3 IAS 39, Financial Instruments: Recognition and Measurement
4 IAS 32, Financial Instruments: Presentation
5 IFRS 7, Financial Instruments: Disclosures
91
Introduction
The majority of IAS 32 was examinable at Financial Accounting and Reporting (IFRS) with the standard
examined at level B, and will be assumed knowledge for the Advanced Level Corporate Reporting paper
However only the more basic areas of IAS 39, IFRS 7 and IFRS 13 were examinable at the Professional
Level. These three standards will be examined in more detail at the Advanced Level.
The main differences are as follows:
 No simplified measurement provisions for basic financial instruments are available.
 There are more complex categories for measurement after initial recognition with four for
financial assets and two for financial liabilities. FRS 102 has a more simplified measurement
approach of generally at amortised cost or fair value through profit or loss.
IFRS 9, Financial Instruments will replace IAS 39, and is examinable in CR as a current issue. The
differences are greater between IFRS and FRS 102 than between IAS 39 and FRS 102.
In this chapter of the Supplement more detail is included even though it is the same as the UK GAAP
material, mainly to set it in the context of the correct IFRS and IAS, but also because financial
instruments are such an important topic at Advanced Level Corporate Reporting. These sections are
labelled 'revision' and can be skimmed through if you have only recently passed the FAR (UK GAAP)
paper.

2 1 Key differences
Section overview
There are some differences in accounting for financial instruments under IFRS.
Under IAS 39, Financial Instruments: Recognition and Measurement the initial measurement of financial
assets or liabilities is at fair value. Entities reporting under FRS 102 measure them initially at transaction
price (this will include transaction costs unless measurement is at fair value through profit or loss).
IAS 39 has a number of categories for measurement after initial recognition, where FRS 102 Section 11
is generally at amortised cost or fair value through profit or loss.
3 2 Financial instruments – introduction and revision
Section overview
 Most of this section will be familiar from your FAR (UK GAAP) studies – the purpose of including it
is to set it in the context of IFRS and provide revision of this important topic.
 The extensive financial reporting requirements for financial instruments are covered by IAS 32,
IAS 39 and IFRS 7.
 A number of common definitions are used in all three standards and IFRS 13.
2.1 Introduction
The existence of financial instruments has a significant effect on the risk profile of organisations. Such
instruments can have a significant effect on profits, solvency and cash flow.
As a result of this widespread use of financial assets and financial liabilities as part of an entity's ordinary
activities, International Financial Reporting Standards have been published to deal with the following:
 Recognition
P
 Measurement
A
 Presentation and disclosure R
T
2.2 Relevant accounting standards

The relevant accounting standards for financial instruments are:
 IAS 32, Financial Instruments: Presentation
D
 IAS 39, Financial Instruments: Recognition and Measurement
 IFRS 7, Financial Instruments: Disclosures
 IFRS 13, Fair Value Measurement
The individual standards cannot be studied in isolation. A number of terms and definitions are used
across the standards and an understanding of financial instruments requires an understanding of the key
concepts in each standard.
2.3 What is a financial instrument?

The definition of a financial instrument is consistent throughout the accounting standards covering
financial instruments. It is introduced in IAS 32.
Key differences: 8 Financial instruments 93

Definition
Financial instrument: Any contract that gives rise to a financial asset of one entity and a financial
liability or equity instrument of another entity.
Note that a financial instrument has two parties. It should be recognised as an asset by one party and
either a liability or equity by the other. The classification of a financial instrument as a financial liability
or equity is particularly important as it will have an effect on gearing.
Worked example: Definitions

List the reasons why physical assets and prepaid expenses do not qualify as financial instruments. These
are the same as under UK GAAP, so refer to your UK GAAP material if you have forgotten.
Solution
Refer to the definitions of financial assets and liabilities given above.
(a) Physical assets: Control of these creates an opportunity to generate an inflow of cash or other
assets, but it does not give rise to a present right to receive cash or other financial assets.
(b) Prepaid expenses, etc: The future economic benefit is the receipt of goods/services rather than
the right to receive cash or other financial assets.
Assets that have physical substance, such as plant and machinery, are not financial assets and neither are
intangible assets, such as patents and brands. These assets generate future economic benefits for an
entity although there is no contractual right to receive cash or another financial asset. Examples of
financial assets include cash, a trade receivable and equity investments.
Worked example: Financial asset

An entity deposits £20,000 of cash with a bank for a fixed term of three years. The £20,000 is a financial
asset of the entity as it has a contractual right to receive the cash in three years' time.
Worked example: Financial liability

In 20X2 an entity entered into a contract that required it to issue shares to the value of £10,000 on
1 January 20X5.
This is a financial liability since the entity is required to settle the contract by issuing a variable number
of shares based on a fixed monetary amount.
If the number of shares were fixed, it would not meet the definition of a financial liability and should be
presented as an equity instrument.
2.4 What is an equity instrument?

Definition
Equity instrument: Any contract that evidences a residual interest in the assets of an entity after
deducting all of its liabilities.
In applying all these definitions it is essential to establish whether or not there is in existence a
contractual right to receive, or a contractual obligation to deliver, which is enforceable by law.

Worked example: Ordinary shares
Holders of ordinary shares in a company own equity instruments. Although they own the residual
interest in a company, they have no contractual right to demand any of it to be delivered to them, for
example by way of a dividend. Equally, the company has issued an equity instrument, not a financial
liability, because the company has no contractual obligation to distribute the residual interest.
An entity that invests in the ordinary shares of another entity holds a financial asset, because an equity
interest in another entity falls within the definition of a financial asset.
Interactive question: Financial instruments

Requirement
Identify which of the following are financial instruments, financial assets, financial liabilities or equity
instruments and for which party.
(1) Offertake Ltd sells £5,000 of inventory to Guideprice Ltd on 30-day payment terms.
(2) Ashdell Ltd pays £20,000 in advance for a 12-month insurance policy.
(3) Wellbeck Ltd issues 100,000 ordinary shares which are acquired by Keeload Ltd.
(4) Cashlow plc borrows £200,000 under a mortgage from Norbert plc.
2 3 IAS 39, Financial Instruments: Recognition and Measurement
Section overview
 Most of this section will be familiar from your FAR (UK GAAP) studies – the purpose of including it
is to set it in the context of IFRS, so that you know which material belongs in which standard.
 A financial instrument should initially be measured at fair value, usually including transaction costs.
Measurement at fair value is a difference from UK GAAP, which required measurement at the
transaction price. The definition of fair value is also different from that of UK GAAP.
 Financial assets and liabilities should be remeasured either at fair value or at amortised cost. P
A
R
T
3.1 Introduction
The purpose of IAS 39 is to establish the principles by which financial assets and financial liabilities
should be recognised and measured in financial statements.
D
3.2 Initial recognition and measurement
In general a financial asset or financial liability should be:
 Recognised when an entity enters into the contractual provisions of the financial instrument.
 Initially measured at its fair value. Note that this is a difference from FRS 102, which requires
measurement at the transaction price.
The general rule is that transaction costs, such as brokers' and professional fees, should be included in
the initial carrying amount. The exception is that transaction costs for financial instruments classified as
at fair value through profit or loss should be recognised as an expense in profit or loss, however these
are not included in the Financial Accounting and Reporting syllabus.
IAS 39 requires the recognition of all financial instruments in the statement of financial position.
Fair value is defined as follows by IFRS 13, Fair Value Measurement. It is an important definition, and is
different from the one used in FRS 102.

Definition
IFRS 13 provides extensive guidance on how the fair value of assets and liabilities should be established.
Note that FRS 102 does not provide this guidance. Extra guidance on
This standard requires that the following are considered in determining fair value: fair value not in UK
GAAP
(a) The asset or liability being measured
(b) The principal market (ie, that where the most activity takes place) or where there is no principal
market, the most advantageous market (ie, that in which the best price could be achieved) in
which an orderly transaction would take place for the asset or liability
(c) The highest and best use of the asset or liability and whether it is used on a standalone basis or in
conjunction with other assets or liabilities
(d) Assumptions that market participants would use when pricing the asset or liability
Having considered these factors, IFRS 13 provides a hierarchy of inputs for arriving at fair value. It
requires that level 1 inputs are used where possible:
Level 1 Quoted prices in active markets for identical assets that the entity can access at the
measurement date
Level 2 Inputs other than quoted prices that are directly or indirectly observable for the asset
Level 3 Unobservable inputs for the asset
If an entity has investments in equity instruments that do not have a quoted price in an active market
and it is not possible to calculate their fair values reliably, they should be measured at cost.
The fair value on initial recognition is normally the transaction price. However, if part of the
consideration is given for something other than the financial instrument, then the fair value should be
estimated using a valuation technique.
Worked example: Initial fair value

An entity enters into a marketing agreement with another organisation. As part of the agreement the
entity makes a two year £5,000 interest free loan. Equivalent loans would normally carry an interest rate
of 6%, given the borrower's credit rating. The entity made the loan in anticipation of receiving future
marketing and product benefits.
The fair value of the loan can be determined by discounting the future cash flows to present value using
the prevailing market interest rate for a similar instrument with a similar credit rating. The present value
2
of the cash flow in two years time at 6% is £4,450 (£5,000 × (1/1.06 )). On initial recognition of the
financial asset the entity should recognise a loss of £550 as follows:
DR Loan £4,450
DR Loss (finance expense) £550
CR Cash £5,000
The difference between this initial amount recognised of £4,450 and the final amount received of
£5,000 should be treated as interest received and recognised in profit or loss over the two-year period.
3.3 Subsequent measurement of financial assets (revision)

After initial recognition at fair value the subsequent measurement of financial assets and the treatment
of profits and losses depends upon how they were categorised. For the purposes of your Financial
Accounting and Reporting studies all financial assets were assumed to be held to maturity and were
therefore be measured at amortised cost using the effective interest method. The other categories of
measurement will be covered at Advanced Level.

Amortised cost is:
 the initial amount recognised for the financial asset
 less any repayments of the principal sum
 plus any amortisation
The amount of amortisation should be calculated by applying the effective interest method to spread
the financing cost (that is the difference between the initial amount recognised for the financial asset
and the amount receivable at maturity) over the period to maturity. The amount amortised in respect of
a financial asset should be recognised as income in profit or loss.
Definition
Effective interest rate: The rate that exactly discounts estimated future cash payments or receipts
through the expected life of the instrument or, when appropriate, a shorter period to the net carrying
amount of the financial asset or financial liability.
If required, the effective interest rate will be given in the examination. You will not be expected to
calculate it.
Worked example: Amortised cost (revision)

An entity acquires a zero coupon bond with a nominal value of £20,000 on 1 January 20X6 for £18,900.
The bond is quoted in an active market and broker's fees of £500 were incurred in relation to the
purchase. The bond is redeemable on 31 December 20X7 at a premium of 10%. The effective interest
rate on the bond is 6.49%.
Set out the journals to show the accounting entries for the bond until redemption if it is classified as a
held-to-maturity financial asset. The entity has a 31 December year end.
Solution
On 1 January 20X6
DR Financial asset (£18,900 plus £500 broker fees) £19,400
CR Cash £19,400
On 31 December 20X6 P
A
DR Financial asset (£19,400  6.49%) £1,259
R
CR Interest income £1,259 T
On 31 December 20X7
DR Financial asset ((£19,400 + £1,259)  6.49%) £1,341
CR Interest income £1,341
DR Cash £22,000
CR Financial asset £22,000 D
3.3.1 Loans and receivables (revision)

A financial asset classified as a loan or receivable should also be measured at amortised cost using the
effective interest method.
Amortisation should be recognised as an income in profit or loss.
Most financial assets that meet this classification are simple receivables and loan transactions.
3.4 Subsequent measurement of financial liabilities (revision)

Most financial liabilities should be measured at amortised cost using the effective interest method.
This includes redeemable and irredeemable preference shares which have been recognised as liabilities.
Note that the effective interest rate will be equal to the actual interest rate for irredeemable preference
shares as there is no redemption premium.

2 4 IAS 32, Financial Instruments: Presentation
Section overview
 Most of this Section will be familiar from your FAR (UK GAAP) studies – the purpose of including it
is to set it in the context of IFRS.
 Financial instruments should be presented as assets, liabilities or equity in the statement of
financial position.
 Compound financial instruments should be split between their liability and equity components.
 Interest, dividends, gains and losses should be presented in a manner consistent with the
classification of the related financial instrument.
 Financial assets and financial liabilities can only be offset in limited circumstances.
4.1 Objectives and scope of IAS 32

In general, IAS 32, Financial Instruments: Presentation is the equivalent of FRS 102 Section 22
Liabilities and Equity, which you studied for FAR (UK GAAP).
The objective of IAS 32 is to enhance a user's understanding of the way in which financial instruments
affect an entity's financial performance, financial position and cash flows. IAS 32 sets out the
presentation requirements for financial instruments and their related interest or dividends, and specifies
the circumstances in which they should be offset.
The principles that underlie the standard are consistent with, and complement, those in IAS 39, which
addresses recognition and measurement criteria.
The scope of IAS 32 is that it applies to all entities and to all types of financial instruments except where
another standard is more specific. Examples of areas which are outside the scope of IAS 32 are:
 Subsidiaries accounted for under IAS 27, Separate Financial Statements and IFRS 10, Consolidated
Financial Statements
 Associates and joint ventures accounted for under IAS 28, Investments in Associates and Joint
Ventures
Worked example: Investments in subsidiaries (revision)

Greatdane plc acquired 40,000 ordinary shares in Subtime Ltd which represents 80% of its issued
ordinary share capital. While these ordinary shares are a financial asset of Greatdane plc, in its
consolidated financial statements IAS 32 (and IAS 39) does not apply; the provisions of IFRS 10,
Consolidated Financial Statements should be applied.
In the separate (company only) financial statements of Greatdane plc, IAS 27, Separate Financial
Statements allows a choice of accounting treatment. The investment may be accounted for either at cost
or in accordance with IAS 39 (as a financial asset).
In practice, most companies account for investments in subsidiaries, associates and jointly controlled
entities at cost in their separate financial statements. Therefore, the provisions of IAS 32 (and IAS 39) are
generally only applied to minor investments where the investor does not have control, significant
influence or joint control.
4.2 Presentation of equity and liabilities (revision)

When an entity issues a financial instrument, it should classify it according to the substance of the
contract under which it has been issued. It should be classified as:
 a financial asset
 a financial liability
 an equity instrument

The critical feature of a liability is an obligation to transfer economic benefit. Therefore, the financial
instrument is a financial liability if there is:
 a contractual obligation on the issuer to deliver cash/another financial asset, or
 a contractual right for the holder to receive cash/another financial asset.
Where this feature is not met, then the financial instrument is an equity instrument.
Worked example: Classification of financial instruments (revision)

Alpha Ltd issues 100,000 £1 ordinary shares.
These would be classified as an equity instrument:
 The shareholders own an equity instrument because although they own a residual interest in the
company, they have no contractual right to demand any of it to be delivered to them eg, by way
of dividend.
 The company has issued an equity instrument because it has no contractual obligation to distribute
that residual interest.
4.3 Preference shares (revision)

Preference shares provide the holder with the right to receive an annual dividend (usually of a
predetermined and unchanging amount) out of the profits of a company, together with a fixed amount
on the ultimate liquidation of the company or at an earlier date if the shares are redeemable. The legal
form of the instrument is equity.
IAS 32 treats most preference shares as liabilities. This is because they are, in substance, loans.
Fixed annual dividend = 'interest'
Fixed amount on redemption/liquidation = 'repayment of loan'
In practical terms, preference shares are only treated as part of equity when:
 they will never be redeemed; or
 the redemption is solely at the option of the issuer and the terms are such that it is very unlikely at
the time of issue that the issuer will ever decide on redemption; and P
A
 the payment of dividends is discretionary. R
For the purposes of your exam, you will be told whether the payment of dividends is discretionary or T
mandatory in relation to irredeemable preference shares.
4.4 Compound financial instruments (revision)

A compound or 'hybrid' financial instrument is one that contains both a liability component and an D
equity component. As an example, an issuer of a convertible bond has:
 the obligation to pay annual interest and eventually repay the capital – the liability component;
and
 the possibility of issuing equity, should bondholders choose the conversion option – the equity
component.
In substance, the issue of such a bond is the same as issuing separately a non-convertible bond and an
option to purchase shares.
Worked example: Compound instruments (revision)

A company issued 3,000 convertible 6% ten year bonds at £100 each with total issue costs of £1,500.
The present value of the redemption value and interest payments determined at market yields for an
investment without the conversion option was £275,000.
What amounts should be attributed to the liability and equity components?

Solution
£
Net proceeds on issue (3,000  £100) 300,000
Fair value of liability component (275,000)
Equity component 25,000
Therefore the following should be recognised in the statement of financial position:
Liability (275,000 – (1,500  275/300 issue costs)) £273,625
Equity (Other reserves) (25,000 – (1,500  25/300 issue costs)) £24,875
Note how the treatment of a convertible bond in this way improves a company's gearing as compared
to treating the whole £300,000 as debt.
4.5 Interest, dividends, losses and gains (revision)

Interest, dividends, losses and gains arising in relation to a financial instrument that is classified as a
financial liability should be recognised in profit or loss for the relevant period.
4.6 Offsetting (revision)

Financial assets and financial liabilities should generally be presented as separate items in the statement
of financial position. However, offset is required if:
 the entity has a legal right of offset; and
 the entity intends to settle on a net basis.
Worked example: Offsetting

Herdings plc and Intake Ltd trade with each other. Herdings plc has recognised in its financial
statements trade receivables of £40,000 and trade payables of £20,000 in respect of Intake Ltd.
Herdings plc and Intake Ltd have an informal arrangement to periodically offset balances and settle on a
net basis.
Herdings plc should not offset the trade receivables and trade payables as no legal right of offset exists.
While its custom and practice is to settle on a net basis, no formal right of setoff exists.
4.7 Treasury shares (revision)

It is becoming increasingly popular for companies to reacquire their own shares as an alternative to
making dividend distributions and/or as a way to return excess capital to shareholders. Equity
instruments reacquired by the entity which issued them are known as treasury shares.
The treatment of these treasury shares is that:
 they should be deducted from equity (shown as a separate reserve) and the original share capital
and share premium amounts remain unchanged;
 no gain or loss should be recognised in profit or loss on their purchase, sale, issue or cancellation;
 consideration paid or received should be recognised directly in equity; and
 although the shares are shown separately in equity, they are deducted in the weighted average
number of shares calculation for the purposes of calculating EPS (see Part E).
The amount of treasury shares held should be disclosed either in the statement of financial position or in
the notes to the financial statements in accordance with IAS 1, Presentation of Financial Statements.

Worked example: Treasury shares
An entity entered into a share buyback scheme. It reacquired 10,000 £1 ordinary shares for £2 cash per
share. The shares had originally been issued for £1.20 per share.
The entity should record the reacquired shares as a debit entry of £20,000 in equity. The original share
capital and share premium amounts of £10,000 and £2,000 remain unchanged.
£ £
DR Treasury shares 20,000
CR Cash 20,000
3 5 IFRS 7, Financial Instruments: Disclosures
Section overview
 The disclosures required by IFRS 7 are extensive. They are covered in detail at Advanced Level,
however, and so are not covered in detail here.
5.1 Objectives of IFRS 7 (revision)

Information concerning an entity's exposure to risk and how the entity manages that risk continues to
be important when assessing an entity's financial position and performance. The IASB issued IFRS 7
because it felt that existing standards needed to be improved to ensure that disclosures made in this
area provided greater transparency of information, to allow users to better assess the risks that an entity
is exposed to. (This debate was not needed for FRS 102, which is based, indirectly, on IFRS 7.)
The objective of IFRS 7 is to require entities to provide disclosures in their financial statements which
enable users to evaluate:
 the significance of financial instruments for the entity's financial position and performance; and
 the nature and extent of risks arising from financial instruments to which the entity is exposed
during the period and at the reporting date, and how the entity manages those risks.
P
A
R
T


(1) The inventory is not a financial instrument as it is a physical asset. Guideprice Ltd should recognise
a trade payable in its financial statements; this is a financial liability because there is a contractual
obligation to pay the amount in cash. Conversely, Offertake Ltd records a trade receivable for
£5,000, which is a financial asset as it has the contractual right to receive cash.
(2) Ashdell Ltd has paid for services in advance. The £20,000 should be recorded as a prepayment. The
future economic benefit is the right to receive insurance services rather than cash, ordinary shares
or another financial asset. Therefore, prepayments are not financial instruments.
(3) The ordinary shares are an equity instrument of Wellbeck Ltd as they give the holder a residual
interest in the assets of Wellbeck Ltd after deducting the liabilities. The ordinary shares are a
financial asset of Keeload Ltd.
(4) Cashlow plc has entered into a mortgage. The contractual obligation to repay £200,000 to Norbert
plc is a financial liability. Norbert plc has a financial asset as it has the contractual right to receive
£200,000 cash.

CHAPTER 9
Other standards
Introduction
Topic List
1 Key differences
2 IAS 10, Events After the Reporting Period
3 IAS 20, Accounting for Government Grants and Disclosure of Government Assistance
103
Introduction
There are no significant differences in the treatment of provisions under IFRS. IAS 37 was covered in
your Accounting syllabus and at a higher level under FRS 102 in the Financial Accounting and Reporting
(UK GAAP) syllabus, so it will not be covered again here. IAS 10 and IAS 20 (FRS 102 sections) were both
introduced for the first time in the FAR syllabus (UK GAAP) and there are some differences in IFRS.
Knowledge of all three standards will be assumed at Advanced Level.

2 1 Key differences
Section overview
 There are no significant differences in the treatment of provisions under IFRS.
 There are some differences in the treatment of events after the reporting period and government
grants.
There are some differences between FRS 102 and IAS 10, Events after the Reporting Period or IAS 20,
Accounting for Government Grants and Disclosure of Government Assistance.
 Under IAS 10 an equity dividend declared after the year end is not recognised but is disclosed in
the notes. Under FRS 102 the dividend is not recognised as a liability but may be presented as a
segregated component of profit and loss account reserve (retained earnings).
 IAS 20 identifies two methods for the recognition of government grants, a capital or an income
approach, although it only permits the income approach. Under the income approach the grant
should be recognised in profit or loss over the periods in which the entity recognises as expenses
the costs which the grant are intended to compensate. Under FRS 102 entities can instead account
for grants using either the performance model or the accrual model. This choice is made on a class
by class basis.
 IAS 20 permits government grants related to assets to be presented under either the deferred
income method, which would be consistent with FRS 102, or the netting-off method. Under the
netting-off method the grant is deducted from the carrying amount (net book value) of the asset.
FRS 102 does not permit this treatment.
2 2 IAS 10, Events After the Reporting Period
Section overview
 The only difference from FRS 102 relates to dividends.
 They may not be shown as a component of retained earnings.
P
A
R
2.1 Dividends T
Dividends on equity shares proposed or declared after the reporting period should be treated as follows:
 They cannot be shown as a liability as there is no obligation at the end of the reporting period.
 The amount of dividends payable should be disclosed in the notes to the financial statements.
D
 Under UK GAAP, but not IAS 10, the amount of the dividend may be presented as a segregated
component of the profit and loss account reserve in the balance sheet at the end of the reporting
period.
Not allowed under IAS 10. (Allowed under FRS 102)
Equity dividends paid are reflected in the statement of changes in equity.
Key differences: 9 Other standards 105

1 3 IAS 20, Accounting for Government Grants and Disclosure of
Government Assistance
Section overview
 Grants related to income should be recognised over the period in which the associated costs are
incurred. This is different from FRS 102, in which grants may be recognised based on either
the performance model or the accrual model, on a class by class basis.
 Grants related to assets may be presented by either:
– setting up the grant as deferred income (as in FRS 102); or
– netting off the grant from the cost of the asset (not permitted by FRS 102).
 Grants received in the form of non-monetary assets should be recognised at fair value.
 Repayment of a grant should be treated as a change in accounting estimate.
3.1 Measurement
IAS 20 identifies two methods which could be used to account for government grants:
 Capital approach: recognise the grant outside profit or loss.
 Income approach: the grant is recognised in profit or loss over one or more periods.
IAS 20 requires grants to be recognised under the income approach, that is grants should be
recognised in profit or loss over the periods in which the entity recognises as expenses the costs which
the grants are intended to compensate.
It would be against the accrual principle to recognise grants in profit or loss on a receipts basis, so a
systematic basis of matching must be used. A receipts basis would only be acceptable if no other basis
was available.
It will usually be relatively easy to identify the costs related to a government grant, and thereby the
period(s) in which the grant should be recognised in profit or loss.
Note that the performance model and the accrual model bases of recognition are not used in
IAS 20.
3.1.1 Depreciating assets

Where grants are received in relation to a depreciating asset, the grant should be recognised over the
periods in which the asset is depreciated and in the same proportions.
Interactive question: Grants for depreciating assets

Arthur Ltd receives a government grant representing 50% of the cost of a depreciating asset which cost
£40,000 and has a nil residual value.
Requirement
How should the grant be recognised if Arthur Ltd depreciates the asset:
 over four years straight line, or
 at 40% reducing balance?

3.1.2 Non-depreciating assets
In the case of grants for non-depreciable assets, certain obligations may need to be fulfilled, in which
case the grant should be recognised in profit or loss over the periods in which the cost of meeting
the obligation is incurred. For example, if a piece of land is granted on condition that a building is
erected on it, then the grant should be recognised in profit or loss over the building's life.
3.2 Presentation of grants

3.2.1 Grants related to assets
Grants related to assets are used to acquire or construct specific long term assets.
Government grants related to assets (including non-monetary grants at fair value) should be presented
in the statement of financial position either:
 by setting up the grant as deferred income; or
 by deducting the grant in arriving at the carrying amount of the asset (that is netting off).
Same as FRS 102

3.2.2 Deferred income method
The deferred income method sets up the grant as deferred income in the statement of financial position,
which is recognised in profit or loss on a systematic and rational basis over the useful life of the asset.
Normally this corresponds to the method of depreciation on the related asset.
3.2.3 Netting-off method Not allowed in FRS 102
The netting-off method deducts the grant in arriving at the carrying amount of the asset to which it
relates. The grant is recognised in profit or loss over the life of a depreciable asset by way of a reduced
depreciation charge.
Worked example: Grants related to assets

An entity purchased an item of equipment for £50,000 on 1 January 20X5. It will depreciate this
machinery on a straight-line basis over its useful life of five years, with a zero residual value. Also on
1 January 20X5, the entity received a government grant of £5,000 to help finance this equipment.
Under the netting-off method the grant and the equipment should be presented in the statement of
profit or loss for the year to 31 December 20X5 and in the statement of financial position at that date as
follows: P
A
Statement of financial position R
£ T
Equipment
Cost (50 – 5) Not allowed in 45,000
Depreciation FRS 102 (9,000)
Statement of profit or loss
D
Charge: depreciation £9,000
Under the deferred income method the grant and the equipment should be presented in the
statement of profit or loss for the year to 31 December 20X5 and in the statement of financial position
at that date as follows:
Statement of financial position Same as FRS
102 £
Equipment
Cost 50,000
Depreciation (10,000)
Deferred income – non-current 3,000
Deferred income – current (the amount to be recognised in profit or loss in 20X6) 1,000
4,000
(Total deferred income = 5,000 grant less 1,000 recognised in profit or loss = 4,000)

Statement of profit or loss
Charge: Depreciation £10,000
Credit: Deferred income £1,000
Points to note
1 There are less likely to be impairment issues if the grant has been deducted from the cost of the
asset as this reduces the carrying amount. In addition, the financial statements will be less
comparable with those of a similar entity that has not received government assistance.
2 Deferred income (recognised when using the deferred income method) should be split between
current and non-current portions for disclosure purposes.
3.2.4 Grants related to income

Government grants related to income are defined as those not related to assets and can be presented in
two ways:
 a credit in profit or loss (either separately, or under a general heading such as 'other income'); or
 a deduction from the related expense.
Treating the grant as a deduction from the related expense (the net treatment) results in the statement
of profit or loss being less comparable with those of similar entities that have not received such grants.
This treatment may also lead to the particular category of expenditure being excessively low in one year,
or in comparison with other categories of expenditure during that period. Disclosure of grants received
will therefore be important to assist comparison and understanding.
3.3 Repayment of government grant

A government grant that becomes repayable should be accounted for as a change in an accounting
estimate (see IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors).
Repayment of a grant related to income should be applied in the following order:
 Against any unamortised deferred credit set up in respect of the grant
 To the extent that the repayment exceeds any such deferred credit, or where no deferred
credit exists, the repayment should be recognised immediately as an expense P
A
Repayment of a grant related to an asset should be recognised by either: R
T
 increasing the carrying amount of the asset; or
 reducing the deferred income balance by the amount repayable.
The cumulative additional depreciation that would have been recognised to date as an expense in the
absence of the grant should be recognised immediately as an expense.
This is more specific than FRS 102, which states that 'where a grant becomes repayable it shall be D
recognised as a liability when the repayment meets the definition of a liability'.


The grant should be recognised in the same proportion as the depreciation.
(a) Straight line
Grant
Depreciation recognised in
Year expense profit or loss
£ £
1 (40 ÷ 4) and 50% thereof 10,000 5,000
2 (40 ÷ 4) and 50% thereof 10,000 5,000
3 (40 ÷ 4) and 50% thereof 10,000 5,000
4 (40 ÷ 4) and 50% thereof 10,000 5,000
(b) Reducing balance

Grant
Depreciation recognised in
Year expense profit or loss
£ £
1 (40  40%) and 50% thereof 16,000 8,000
2 ((40 – 16)  40%) and 50% thereof 9,600 4,800
3 ((40 – 16 – 9.6)  40%) and 50% thereof 5,760 2,880
4 (remainder) 8,640 4,320
P
A
R
T

CHAPTER 10
Group accounts: basic

principles
Introduction
Topic List
1 Key differences and IFRS 3
2 IFRS 10, Consolidated Financial Statements
3 IFRS 12, Disclosure of Interests in Other Entities
4 IAS 27, Separate Financial Statements
111
Introduction
The basic principles of consolidation, for example the concept of the group as a single entity, and nearly
all of the calculations, are the same under IFRS and UK GAAP. Some of the definitions are different.

1 1 Key differences and IFRS 3
Section overview
 The definition of control is different, although not in such a way as to affect the calculations for
your exam.
 The definition of a business combination and fair value, and some of the terminology are different.
 Post-acquisition changes to the calculation of goodwill are generally not permitted under IFRS 3.
Contingent consideration should be reassessed at fair value each year and the difference taken to
profit or loss. FRS 102 permits changes to goodwill for changes in the estimate of contingent
consideration
 Goodwill is defined differently in IFRS 3 and is not amortised, as in FRS 102, but reviewed for
impairment annually.
 The non-controlling interest may be measured based on the share of ownership not held by the
parent (ie, on a proportionate basis) or at fair value. FRS 102 does not permit fair value.
1.1 Which standards govern group accounts?

In IFRS, business combinations are governed by IFRS 3, Business Combinations. In UK GAAP, business
combinations are governed by FRS 102 Section 19. Further relevant standards are IFRS 10, Consolidated
Financial Statements, IFRS 12, Disclosure of Interests in Other Entities and IAS 27, Separate Financial
Statements.
FRS 102 definition
1.2 Control puts more emphasis
on this.
Usually a holding of over 50% of the ordinary shares in S will give P control of S.
As we saw in Section 1, control means the ability to govern financial and operating policies of S with
a view to gaining economic benefits from its activities. This is an extension of the basic concept of
control, introduced in Chapter 1 in the context of the definition of assets.
IFRS 10, Consolidated Financial Statements defines control as consisting of three elements:
 Power FRS 102 does not
P
 Exposure to variable returns specify these three
A
 An investor's ability to use power to affect its amount of variable returns elements in this way. R
T
In an individual company, the assets are under the direct control of the company. In a group, the
subsidiary's assets are under indirect control through the parent's control of the subsidiary.
IFRS 10 states that an investor controls an investee if, and only if, it has all of the following:
 Power over the investee
 Exposure, or rights, to variable returns from its involvement with the investee D
 The ability to use its power over the investee to affect the amount of the investor's returns
Power is defined as existing rights that give the current ability to direct the relevant activities of
the investee. There is no requirement for that power to have been exercised.
In some cases assessing power is straightforward, for example where power is obtained directly and
solely from having the majority of voting rights or potential voting rights, and as a result the ability to
direct relevant activities.
Relevant activities include the following:
 Selling and purchasing goods or services
 Managing financial assets
 Determining a funding structure or obtaining funding
Key differences: 10 Group accounts: basic principles 113

In other cases, the assessment of power is more complex. IFRS 10 gives the following examples of
rights, other than voting rights or potential voting rights which can give an investor power:
 Rights to appoint, reassign or remove key management personnel who can direct the relevant
activities.
 Rights to appoint or remove another entity that directs the relevant activities.
 Rights to direct the investee to enter into, or veto changes to, transactions for the benefit of the
investor.
 Other rights, such as those specified in a management contract.
Variable returns have the potential to vary as a result of the investee's performance. Examples are
dividends, potential losses from loan guarantees given on behalf of the investee, residual interests on
liquidation.
While the wording of the definition of control is different in FRS 102, it is likely that most of the
situations you will meet in your Corporate Reporting exam will be such as to meet (or not meet)
the definition of control under both IFRS and FRS 102.
1.3 Business combination

The objective of IFRS 3, Business Combinations is to set out the accounting and disclosure
requirements for a business combination. In practice business combinations can be structured in all
sorts of different ways, usually for reasons which are peculiar to the parties to the combination and/or to
suit the legal and tax environments in which they operate.
In an area of such potential complexity IFRS 3 looks beyond the legal form of the transaction to the
underlying substance. This can be seen in the definitions below.
Definitions
Business combination: A transaction or other event in which an acquirer obtains control of one or
more businesses.
Business: An integrated set of activities and assets capable of being conducted and managed for the
purpose of providing:
(a) a return in the form of dividends; or
(b) lower costs or other economic benefits directly to investors or other owners.
A business generally consists of inputs, processes applied to those inputs, and resulting outputs that are,
or will be, used to generate revenues. If goodwill is present in a transferred set of activities and assets,
the transferred set is presumed to be a business.
Note that the FRS 102 definition of a business combination is different:

'The bringing together of separate entities or businesses into one reporting entity'
This is unlikely to have any serious implications for your exam.
1.4 Acquisition method of accounting

All business combinations should be accounted for by applying the acquisition method. This involves
five key steps:
The last two points are not specifically
Step 1: Identifying the acquirer mentioned in the FRS 102 summary of
Step 2: Determining the acquisition date the method, but the principles are the
Step 3: Measuring the consideration transferred same in the detail.
Step 4: Recognising and measuring the identifiable assets acquired, the liabilities assumed and
any non-controlling interest in the acquiree
Step 5: Recognising and measuring goodwill or a gain from a bargain purchase
We will look at these steps in more detail in the rest of this chapter.

1.5 Measuring the consideration transferred FRS 102 called this the 'cost
The cost of the business combination is the total of the fair values of the combination' – it's the
of the consideration transferred. same thing.
As in FRS 102
1.6 Fair value of consideration
IFRS 3 requires that consideration given should be measured at fair value at the acquisition date.
Different definition from that in FRS 102

Definition
1.7 Contingent consideration
Definition
Contingent consideration: An obligation of the acquirer to transfer additional consideration to the
former owners of the acquiree if specified future events occur or conditions are met.
The acquiree's shareholders may have a different view from the acquirer as to the value of the acquiree.
 The acquiree may be the subject of a legal action which the acquiree's shareholders believe will be
settled at no cost, but is believed by the acquirer to be likely to result in an expensive settlement
 The two parties may have different views about the likely future profitability of the acquiree's
business
In such cases it is often agreed that additional consideration may become due, depending on how the
future turns out (for example, the settlement of the legal actions at a cost lower than that expected by
the acquirer and future earnings being higher than the acquirer expected). Such consideration is
'contingent' on those future events/conditions.
Contingent consideration agreements result in the acquirer being under a legal obligation at the
acquisition date to transfer additional consideration, should the future turn out in specified ways. IFRS 3 P
therefore requires contingent consideration to be recognised as part of the consideration transferred A
and measured at its fair value at the acquisition date. R
T
Point to note: Estimates of the amount of additional consideration and of the likelihood of it being
issued are both taken into account in estimating this fair value.
It may turn out that the amount of the contingent consideration actually transferred is different from the
original estimate of fair value. In terms of the examples given above, the legal action may be settled at
no cost to the acquiree and the acquiree's profits may be higher than the acquirer expected. D
IFRS 3 treats such subsequent adjustments to the quantity of the contingent consideration in ways
familiar from IAS 10, Events after the Reporting Period:
 If (and this will be very rare) the adjustments result from additional information becoming available
about conditions at the acquisition date, they should be related back to the acquisition date,
provided the adjustments are made within the measurement period.
 If (and this will be common) the adjustments result from events occurring after the acquisition
date, they are treated as changes in accounting estimates; they should be accounted for
prospectively and the effect usually recognised in profit or loss. This will be the treatment required
for the additional consideration due after the legal action was settled/the earnings being higher
than expected.
Measurement of the contingent consideration should be reassessed at fair value each year and the
difference taken to profit or loss unless the contingent consideration is in shares. If the contingent
consideration is in shares (ie, classified as equity) then it should not be remeasured but its subsequent
settlement should instead be recognised as part of equity.

Note that this is different from FRS 102 Section 19, which states that if the potential adjustment is
not recognised at the acquisition date but subsequently becomes probable and can be measured
reliably, the additional consideration should be treated as an adjustment to the cost of the business
combination. IFRS restricts the circumstances in which this can happen, and does not refer to
probability or reliable measurement.
Worked example: Contingent consideration

On 1 January 20X7 A acquired 100% of the shares of B when the fair value of B's net assets was
£25 million. The consideration was 4 million shares in A issued at 1 January 20X7 when their market
value was £6 per share and a cash payment of £6 million on 1 January 20X9 if the cumulative profits of
B exceeded a certain amount by that date. At 1 January 20X7 the probability of B hitting that earnings
target was such that the fair value of the possible cash payment was £2 million.
At 31 December 20X7 the probability that B would exceed the required profit level had risen and the
fair value of the contingent consideration was judged to be £4 million.
At 31 December 20X8 it was clear that B had exceeded the profit target and the whole amount would
be payable.
Show calculations of the amounts to be recognised in the statements of financial position and in profit
or loss for the two years ended 31 December 20X8.
Solution
The contingent consideration should be recognised at the acquisition date. It should then be
remeasured at fair value each year end until ultimate settlement of the amount. Changes in fair value
should be recognised in profit or loss.
Statement of financial position at 31 December 20X7
Under UK GAAP,
£
the contingent
Non-current assets – goodwill consideration
Consideration transferred – 4 million shares  £6 would not be part 24,000,000
– contingent at fair value of the goodwill 2,000,000
calculation if not 26,000,000
Net assets acquired probable that B (25,000,000)
Goodwill would hit the 1,000,000
earnings target.
Non-current liabilities – contingent consideration 4,000,000
Profit or loss for year ended 31 December 20X7

Additional contingent consideration 2,000,000
Non-current assets – goodwill (unchanged) Under UK GAAP the 1,000,000
Current liabilities – contingent consideration goodwill would increase 6,000,000
by this amount.
Additional contingent consideration 2,000,000
Interactive question: Contingent consideration

Autumn plc acquired 100% of Spring Ltd on 1 January 20X5 when the fair value of Spring Ltd's
identifiable assets net of liabilities assumed was £20 million. The consideration was as follows:
 Eight million shares in Autumn plc issued on 1 January 20X5 when the market price of Autumn
plc's shares was 350p.
 A further payment of cash on 31 December 20X6:
– £700,000 if Spring Ltd's profits for the year then ended were no less than £2 million; or
– £1,750,000 if Spring Ltd's profits for the year then ended were no less than £3 million.

At 1 January 20X5 the fair value of the contingent consideration was £100,000.
At 31 December 20X5 the fair value of the contingent consideration was £1.2 million.
At 31 December 20X6 Spring Ltd's 20X6 profits per draft financial statements were £3.5 million.
Requirement
Show calculations of the amounts to be recognised in the statements of financial position and in profit
or loss for the two years ended 31 December 20X6.
1.8 Acquisition-related costs

Acquisition-related costs such as professional and other fees relating specifically to the individual
transaction eg, accountants' fees and legal costs are required to be recognised as expenses in the
period in which they are incurred.
Note: This is different from FRS 102, which states that they should be added to the cost of the
combination.
1.9 Goodwill
Goodwill is calculated as the excess of the fair value of the consideration transferred plus any non-
controlling interest over the fair value of the net assets acquired.
Note: This is different from FRS 102, which calculates it as of the fair value of the cost of the
acquisition over the acquirer's interest in the fair value of the net assets acquired.
In practice, if the non-controlling interest is valued at its proportionate share of the subsidiary's net
assets, this will come to the same answer.
Goodwill is not amortised, but should be tested for impairment at least annually.
Note: This is different from FRS 102, according to which goodwill should be amortised over its
useful life.
P
1.10 Bargain purchases A
R
In certain circumstances the parent entity may pay less to acquire a subsidiary than represented by its
T
share of the subsidiary's net assets. This is called a 'bargain purchase' under IFRS 3; under FRS 102 it was
known as negative goodwill.
These circumstances might include the following:
 The subsidiary has a poor reputation.
 It suffers from inherent weaknesses not reflected in its assets and liabilities. D
 The parent company has negotiated a good deal.
A gain on a bargain purchase arises if the fair value of the net assets acquired exceeds the total of the
consideration transferred and the value of any non-controlling interest ie, there is 'negative goodwill'.
IFRS 3 is based on the assumption that this usually arises because of errors in the measurement of the
acquiree's net assets and/or the consideration transferred. So the first action is always to reassess the
identification and measurement of the net assets and the measurement of the consideration
transferred, checking in particular whether the fair values of the net assets acquired correctly reflect
future costs arising in respect of the acquiree.
If the gain still remains once these reassessments have been made, then it is attributable to a bargain
purchase ie, the acquirer has managed to get away with paying less than the full value for the acquiree.
This gain does not meet the Conceptual Framework's definition of a liability, so it must be part of equity.
It should therefore be recognised in profit or loss in the same accounting period as the acquisition is
made.

Note: This is different from FRS 102, which requires negative goodwill to be presented on the
balance sheet below positive goodwill and amortised (releasing the credit to the profit and loss
account) over the period during which the assets acquired in the combination are realised.
1.11 Measurement of non-controlling interest at acquisition date

(a) The traditional method of measuring the NCI at the acquisition date is to measure it at the NCI's
share of the acquiree's net assets, known as the proportionate basis throughout the Financial
Accounting and Reporting materials.
This method results in goodwill being in effect the difference between the cost of the parent's
investment and its share of the net assets acquired. The rationale is that the market transaction
which is the business combination has only provided evidence of the amount of the parent entity's
goodwill; there has been no market transaction to provide evidence of the amount of goodwill
attributable to the NCI. Hence only the acquirer's share of the goodwill is recognised.
This method is the one adopted in the UK, and by international standards before 2007.
(b) The alternative approach works on the basis that the goodwill attributable to the NCI can be
calculated from the estimate of the fair value of the NCI itself. It is an approach which is consistent
with the rest of IFRS 3 which requires the consideration transferred, the assets acquired and the
liabilities acquired all to be measured at fair value.
This method was the one adopted in the US by the FASB.
The fair value method usually results in a higher amount for the NCI; the difference between this
and the amount as traditionally measured is added to the goodwill acquired in the business
combination and is the goodwill attributable to the NCI at the acquisition date.
Note: The choice of method is available for each business combination separately. The choice in respect
of one combination is not binding for subsequent combinations. Note also that FRS 102 does not allow
the fair value method.
Worked example: Measurement of NCI (1)

The consideration transferred by National plc when it acquired 800,000 of the 1,000,000 £1 equity
shares of Locale Ltd was £25 million. At the acquisition date Locale Ltd's retained earnings were £20
million and the fair value of the 200,000 equity shares in Locale Ltd not acquired was £5 million.
Calculate the goodwill acquired in the business combination on the basis that the NCI in Locale Ltd is
measured using:
This is the only basis allowed
(a) Proportionate basis under FRS 102.
(b) Fair value
Solution
NCI on proportionate NCI at
basis fair value
£ £
Consideration transferred 25,000,000 ,25,000,000
NCI – 20% × £21m/fair value 4,200,000 5,000,000
29,200,000 ,30,000,000
Net assets acquired (£1m + £20m) (21,000,000) (21,000,000)
Goodwill acquired in business combination 8,200,000 9,000,000
The only difference between the results of the two methods at the acquisition date is that the NCI and
goodwill are higher by £0.8 million, the amount by which the fair value of the NCI exceeds its share of
the acquired net assets.

Point to note: There is always likely to be a difference between the fair values per share of an equity
holding which provides control over another entity and a holding which does not, because buyers are
prepared to pay a higher price per share if they end up gaining control of the other entity. This higher
price is sometimes referred to as the 'control premium'. In the above example:
 the controlling interest is valued at £31.25 per share (25,000/800); and
 the NCI is valued at £25.00 per share (5,000/200).
1.12 Subsequent measurement of NCI in statement of financial position

If NCI was measured at the acquisition date at fair value, then the carrying amount at the end of each
subsequent period should take that fair value into account. This is best achieved by adapting the
standard consolidation working along the lines of equity accounting for associates, as follows
Consolidation working – Non-controlling interest

£
Fair value of NCI at acquisition date X
Share of post acquisition profits and other reserves
(NCI%  post acquisition) X
X
Where NCI has been measured at fair value and there is an impairment of goodwill, part of that
impairment will be charged to the NCI at the end of the reporting period, based on the NCI %.
For instance, if the goodwill in the worked example in section 1.11 above was impaired by £1,000, the
impairment would be charged as follows:
Proportionate basis
£ £
DR Group retained earnings 1,000
CR Goodwill 1,000
Fair value basis
£ £
DR Group retained earnings (1,000 × 80%) 800
DR Non-controlling interest (1,000 × 20%) 200
CR Goodwill 1,000
Worked example: Measurement of NCI (2) P

A
Continuing with the immediately preceding worked example, Locale Ltd's retained earnings three years R
later were £23 million. T
Calculate the carrying amount of the non-controlling interest three years later on the basis that at
acquisition it was measured using:
(a) Proportionate basis
(b) Fair value
D
Solution
Consolidation working – Net assets of Locale Ltd
At period At Post-
end acquisition acquisition
£ £ £
Share capital 1,000,000 1,000,000 –
Retained earnings 23,000,000 20,000,000 3,000,000
24,000,000 21,000,000 3,000,000

Consolidation working – Non-controlling interest
NCI on NCI at
proportionate fair value
basis
£ £
NCI at acquisition date – share of net assets
(20%  Column 2 (W2))/fair value 4,200,000 5,000,000
Share of post acquisition profits – (20%  post acquisition
Column 3 (W2)) 600,000 600,000
4,800,000 5,600,000
1 2 IFRS 10, Consolidated Financial Statements
Section overview
 With limited exceptions, all parent entities must present consolidated financial statements. The
exceptions and scope are different under IFRS 10.
2.1 Scope
IFRS 10 is to be applied in the preparation of the consolidated financial statements (CFS) of the
group.
Definitions
A group: A parent and all its subsidiaries.
Consolidated financial statements: The financial statements of a group in which the assets, liabilities,
equity, income, expenses and cash flows of the parent and its subsidiaries are presented as those of a
single economic entity.
Non-controlling interest: The equity in a subsidiary not attributable, directly or indirectly, to a parent.
2.2 Background
IFRS 10, Consolidated Financial Statements was published in 2011 and replaced the consolidation
provisions of IAS 27, Consolidated and Separate Financial Statements. The IASB stressed that the purpose
of IFRS 10 was to build upon rather than replace the IAS 27 requirements and concepts but the new
provisions are clearly designed to eliminate the divergent practices which had been possible under
IAS 27.
Like IAS 27, IFRS 10 bases its consolidation model on control, but it seeks to define control in a way
which can be applied to all investees. IAS 27 defined control as 'the power to govern the financial
operating policies of an entity so as to obtain benefits from its activities', as FRS 102 still does. In
practice, this had focussed attention on size of shareholding. IFRS 10 gives a more detailed definition of
control and seeks in that way to reduce the opportunities for reporting entities to avoid consolidation. It
expands upon the limited guidance in IAS 27 regarding the possibility of control without the majority of
voting rights.
The IFRS 10 definition of control was explained in section 1.2.
Learn this in full – it is different from

FRS 102.

2.3 Presentation of CFS
With one exception, a parent must present CFS.
A parent need not prepare CFS if and only if all of the following hold:
 The parent is itself a wholly-owned subsidiary or it is a partially owned subsidiary of another entity
and its other owners, including those not otherwise entitled to vote, have been informed about,
and do not object to, the parent not presenting consolidated financial statements.
 Its securities are neither publicly traded nor in the process of being issued to the public.
 IFRS-compliant CFS are prepared by the immediate or ultimate parent company.
2.4 Scope of CFS

The CFS must include the parent and all subsidiaries, both foreign and domestic, other than:
 those held for sale in accordance with IFRS 5; and
 those held under such long-term restrictions that control cannot be operated.
IFRS 10 is clear that a subsidiary should not be excluded from consolidation simply because it is loss
making or its business activities are dissimilar to those of the group as a whole.
Learn this in full – it is different from FRS 102. There is no UK equivalent of

IFRS 5.
No exemption for cases where severe long-term restrictions prevent the
parent exercising control. However, control may be lost as a result of the
restrictions, such that the entity should no longer be classified as a
subsidiary.
3 3 IFRS 12, Disclosure of Interests in Other Entities

P
A
Section overview R
 IFRS 12 sets out the required disclosures for group accounting. T
3.1 Overview
IFRS 12, Disclosure of Interests in Other Entities provides comprehensive disclosure requirements
regarding a reporting entity's interests in other entities. The disclosure requirements in IAS 27 had been D
criticised as being too limited. The information required by IFRS 12 is intended to help users to evaluate
the nature of, and risks associated with, a reporting entity's interest in other entities and the effects of
those interests on its financial position, financial performance and cash flows. It replaces the disclosure
requirements of all other standards relating to group accounting. The standard requires disclosure of:
 the significant judgements and assumptions made in determining the nature of an interest in
another entity or arrangement, and in determining the type of joint arrangement in which an
interest is held; and
 information about interests in subsidiaries, associates, joint arrangements and structured entities
that are not controlled by an investor.

3.2 Interests in subsidiaries
The following disclosures are required in respect of subsidiaries:
 The interest that non-controlling interests have in the group's activities and cash flows, including
the name of relevant subsidiaries, their principal place of business and the interest and voting rights
of the non-controlling interests.
 The nature and extent of significant restrictions on an investor's ability to use group assets and
liabilities.
 The nature of the risks associated with an entity's interests in consolidated structured entities.
 The consequences of changes in ownership interest in subsidiaries (possible loss of control).
IFRS 12 also requires specific disclosures in respect of associates and joint arrangements. These are
explained in Chapter 13.
3 4 IAS 27, Separate Financial Statements
Section overview
 IAS 27 now covers just the requirements for a parent's separate financial statements.
IAS 27, Separate Financial Statements now deals only with the single entity financial statements of the
parent, the consolidation provisions having been transferred to IFRS 10.
It outlines the accounting and disclosure requirements for the separate financial statements of the
parent or the investor, in which the relevant investments will be accounted for at cost, in accordance
with IAS 39 (IFRS 9) or using the equity method.
The exception to his is investments held for sale which will be accounted for in accordance with IFRS 5,
Non-current Assets Held For Sale and Discontinued Operations.
In its separate financial statements an entity will recognise dividends from other entities, rather than
recognising a share of their profits. An entity recognises a dividend from a subsidiary, joint venture or
associate when its right to receive the dividend is established.


£
Non-current assets – goodwill
Consideration transferred – 8 million shares  £3.50 28,000,000
– contingent at fair value at acquisition date 100,000
28,100,000
Net assets acquired (20,000,000)
Goodwill 8,100,000
Current liabilities – contingent consideration at fair value at period end 1,200,000
Additional consideration for acquisition 1,100,000
Non-current assets – goodwill 8,100,000
Additional consideration for acquisition – (£1.75m paid – £1.2m) 550,000
Note that the contingent consideration of £1.75 million was settled in cash on 31 December 20X6 so
there is no liability to be recognised at the end of 20X6.
P
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T

CHAPTER 11
Consolidated statement of
financial position
Introduction
Topic List
1 Key differences
2 Consolidated statement of financial position workings
125
Introduction
Many of the workings and principles behind consolidation are the same under IFRS and UK GAAP, and
some of the differences are just ones of presentation and terminology. For example, in the calculation of
non-controlling interest, UK GAAP by convention deducts the group share of net assets acquired from
the price paid (called the 'cost of combination'), whereas IFRS adds the non-controlling interest to the
price paid (called the 'consideration transferred') and deducts the total net assets. If the proportionate
method is used for NCI, this will come to the same figure.

1 1 Key differences
Section overview
There are some important differences between FRS 102 and IFRS. You have covered some of them in
Chapter 10, but they are summarised here in section 1.1.
There is a difference in presentation when calculating goodwill. This is illustrated in section 1.2.
A worked example illustrates some of these key differences.
1.1 Consolidated financial statements
FRS 102 IFRS
Non-controlling interest is always measured at its IFRS 3 allows non-controlling interest to be

share of net assets. measured at fair value or its share of net assets.
Acquisition-related costs are added to the cost of Acquisition-related costs are recognised as an
the investment in the subsidiary and affect expense in profit or loss as incurred.
goodwill.
A reasonable estimate of the fair value of the At the acquisition date the fair value of contingent
amounts payable as contingent consideration consideration (taking account of both discounting
(discounted where appropriate) is added to the and the amount likely to be paid) is recognised as
cost of the investment at the acquisition date, part of the consideration transferred.
where it is probable that the amount will be
If subsequent adjustments to this fair value occur
paid and it can be measured reliably.
within the measurement period and are as a result
Where the amount was not probable or could not of additional information about facts or
be reliably measured and hence was not circumstances at the acquisition date, those
recognised, but now is probable and can be adjustments are related back to the acquisition
measured reliably, the additional consideration date, increasing or decreasing goodwill.
should be related back to the acquisition date,
However, if subsequent adjustments to this fair
increasing or decreasing goodwill.
value occur either:
Finalisation of an estimate of provisional amounts
 within the measurement period, but are not P
within 12 months from the acquisition date should
as a result of additional information about A
be related back to the acquisition date, increasing
facts or circumstances at the acquisition date; R
or decreasing goodwill. T
or
 are outside the measurement period.
They are not related back to the acquisition date
but are recognised as an expense in profit or loss.
They do not increase or decrease goodwill. D
Measurement of the contingent consideration
should be reassessed at fair value each year and
the difference taken to profit or loss unless the
contingent consideration is in shares. If the
contingent consideration is in shares (ie, classified
as equity) then it should be remeasured but its
subsequent settlement should instead be
recognised as part of equity,
Goodwill is amortised over its estimated useful IFRS 3 prohibits amortisation and requires annual
economic life. There is a rebuttable presumption impairment reviews.
that this is not more than ten years. Impairment
reviews are required where evidence of
impairment arises.
Key differences: 11 Consolidated statement of financial position 127

FRS 102 IFRS
Negative goodwill is recognised as a separate IFRS 3 requires immediate recognition as a gain

item within goodwill (in the balance sheet). in profit or loss.
Negative goodwill up to the fair values of the non-
monetary assets acquired should be recognised in
the profit and loss account in the periods in which
the non-monetary assets are recovered, whether
through depreciation or sale.
A subsidiary should be excluded from No such exemption on this basis exists under
consolidation if severe long-term restrictions IFRS 10, Consolidated Financial Statements
prevent the parent exercising control. (although control may be lost as a result of the
restrictions, such that the entity should no longer
be classified as a subsidiary).
1.2 Presentation of goodwill working

IFRS compares the consideration transferred (price paid) plus the non-controlling interest to 100% of
the net assets acquired. UK GAAP compares the cost of the combination (price paid) to the group share
of net assets acquired.
Worked example: goodwill working under UK GAAP and IFRS

On 1 January 20X8, Pat Co acquired 80% of Smith Co for £125 million. The share capital of Smith Co at
that date was £100 million and the retained earnings were £30 million. The non-controlling interest at
acquisition is valued at its proportionate share of the subsidiary's net assets.
Requirement:
Calculate the goodwill, presenting your calculation under UK GAAP and IFRS.
Solution
The goodwill acquired in the business combination on 31 December 20X7
UK GAAP IFRS
NCI
£'000 £'000 added
Cost of investment/consideration transferred 125,000 125,000
Non-controlling interest (IFRS = 20% × £130m) – 26,000
125,000 151,000
Net assets recognised (UK = 80% × (£100m + £30m)) (104,000) (130,000) 100% net
Goodwill) 21,000 80% 21,000 assets
net deducted
assets
deduct
As you see, the answer is the same if non-controlling interest under IFRS is valued at its proportionate
share of net assets rather than at fair value. Under UK GAAP this choice is not allowed.
Below is a more comprehensive example, illustrating the NCI presentation, together with a number of
other differences previously covered.
Worked example: UK GAAP and IFRS

On 31 December 20X7 Magnate Ltd acquired 90% of the equity of Tycoon Ltd for a cash payment of
£5 million. At that date the fair value of the 10% of the equity not acquired was £380,000.
Magnate Ltd incurred external professional fees in respect of this acquisition of £250,000 and estimated
that the amount chargeable to the business combination in respect of the staff who worked on it was
£200,000.

At 31 December 20X7 the carrying amount of the net assets recognised by Tycoon Ltd was £2.8 million,
which approximated to their fair value. In addition Magnate Ltd identified the following:
 A trademark developed by Tycoon Ltd which at the acquisition date had a fair value of £400,000
and a useful life of four years.
Magnate Ltd adopts the following accounting policies:
 To measure the non-controlling interest at the acquisition date at fair value, where this is permitted
 To amortise goodwill over five years, where amortisation is permitted
Calculate under UK GAAP and IFRS the goodwill acquired in the business combination on 31 December
20X7.
Solution
The goodwill acquired in the business combination on 31 December 20X7
UK GAAP IFRS
£ £
Cost of investment/consideration transferred 5,000,000 5,000,000
External acquisition costs (Note 1) 250,000 –
Non-controlling interest at fair value – 380,000
5,250,000 5,380,000
Net assets recognised (UK = 90%  2,800,000) (2,520,000) (2,800,000)
Trademark (Note 2) (UK = 90%  400,000) (360,000) (400,000)
Goodwill (Note 3) 2,370,000 2,180,000
Notes
1 Both UK GAAP and IFRS require internal acquisition costs to be recognised as an expense as
incurred.
UK GAAP requires external costs to be added to the cost of the investment in the subsidiary, but
IFRS require them to be recognised as an expense as incurred.
2 Both UK GAAP and IFRS require the recognition of the trademark as an acquired intangible,
because it is separable.
3 UK GAAP requires the amortisation of goodwill, while IFRS prohibits it. Both require goodwill to be
tested for impairment.
P
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2 2 Consolidated statement of financial position workings T
Section overview
A number of standard workings should be used when answering consolidation questions. The workings
are the same as you will have met in your FAR (UK GAAP) studies, except for the goodwill working, D
which has a different presentation and also has impairment of goodwill rather than amortisation.
2.1 Question technique

As questions increase in complexity a formal pattern of workings is needed. Review the standard
workings below, then attempt the Interactive question, which puts these into practice. Apart from the
goodwill working, these are the same as under UK GAAP.
(1) Establish group structure
P Ltd
80%
S Ltd

(2) Set out net assets of S Ltd
At year end At acquisition Post acquisition
£ £ £
Share capital X X X
Retained earnings X X X
X X X
(3) Calculate goodwill
£
Consideration transferred X
Plus non-controlling interest at acquisition X
X
Less net assets at acquisition (W2) (X)
X
Impairment to date (X)
Balance c/f X
The double entry to consolidate the subsidiary will be:
£ £
DR Share of subsidiary's net assets X
DR Goodwill X
CR Investment in subsidiary X
(4) Calculate non-controlling interest (NCI) at year end

£
At acquisition ((NCI% × net assets (W2) or fair value) X
Share of post-acquisition profits and other reserves (NCI% × post-acquisition (W2)) X
X
(5) Calculate retained earnings

£
P Ltd (100%) X
S Ltd (share of post-acquisition retained earnings (W2) X
Goodwill impairment to date (W3) (X)
Group retained earnings X
Point to note: You should use the proportionate basis for measuring the NCI at the acquisition date
unless a question specifies the fair value basis.
Interactive question: Consolidated statement of financial position workings
The following are the summarised statements of financial position of a group of companies as at
31 December 20X1.
Rik Ltd Viv Ltd Neil Ltd
£ £ £
Non-current assets
Property, plant and equipment 100,000 40,000 10,000
Investments
Shares in Viv Ltd (75%) 25,000
Shares in Neil Ltd (2/3) 10,000
Current assets 45,000 40,000 25,000
180,000 80,000 35,000
Equity
Share capital (£1 ordinary) 50,000 20,000 10,000
Retained earnings 100,000 40,000 15,000
Total equity 150,000 60,000 25,000
Liabilities 30,000 20,000 10,000
180,000 80,000 35,000
Rik Ltd acquired its shares in Viv Ltd and Neil Ltd during the year, when their retained earnings were
£4,000 and £1,000 respectively. At the end of 20X1 the goodwill impairment review revealed a loss of
£3,000 in relation to the acquisition of Viv Ltd.

Requirement
Prepare the consolidated statement of financial position of Rik Ltd at 31 December 20X1.
Rik Ltd: Consolidated statement of financial position as at 31 December 20X1
£
Non-current assets
Property, plant and equipment
Intangibles (W3)
Current assets

Share capital
Retained earnings (W5)
Non-controlling interest (W4)

Total equity
Liabilities
WORKINGS
(1) Group structure
Rik Ltd
75% 2/3
Viv Ltd Neil Ltd

(2) Net assets
Year end Acquisition Post-acquisition
£ £ £
Viv Ltd
Share capital
Retained earnings
P
A
Year end Acquisition Post-acquisition R
£ £ £ T
Neil Ltd
Share capital
Retained earnings

(3) Goodwill
Viv Ltd Neil Ltd Total
£ £ £
Consideration transferred
Plus non-controlling interest at acquisition
Less net assets at acquisition
Viv Ltd (W2)
Neil Ltd (W2)
Goodwill
Impairment to date
Balance c/f
(4) Non-controlling interest
£
Viv Ltd – Share of net assets at acquisition (W2)
– Share of post-acquisition (W2)
Neil Ltd – Share of net assets at acquisition (W2)
– Share of post-acquisition (W2)
(5) Retained earnings
£
Rik Ltd
Viv Ltd – Share of post-acquisition retained earnings (W2)
Neil Ltd – Share of post-acquisition retained earnings (W2)
Goodwill impairment to date (W3)


Rik Ltd: Consolidated statement of financial position as at 31 December 20X1
£
Non-current assets
Property, plant and equipment (100,000 + 40,000 + 10,000) 150,000
Intangibles (W3) 6,667
156,667
Current assets (45,000 + 40,000 + 25,000) 110,000
266,667
Called up share capital 50,000
Retained earnings (W5) 133,334
183,334
Non-controlling interest (W4) 23,333
Total equity 206,667
Liabilities (30,000 + 20,000 + 10,000) 60,000
266,667
WORKINGS
(1) Group structure
Rik Ltd
75% 2/3
Viv Ltd Neil Ltd

(2) Net assets
Post- P
A
Year end Acquisition acquisition R
£ £ £ T
Viv Ltd
Share capital 20,000 20,000 –
60,000 24,000
Neil Ltd
Share capital 10,000 10,000 – D
25,000 11,000
(3) Goodwill
Viv Ltd Neil Ltd Total
£ £ £
Consideration transferred 25,000 10,000
Non-controlling interest at acquisition
Viv Ltd (25% × 24,000 (W2)) 6,000
Neil Ltd (1/3 × 11,000 (W2)) 3,667
Net assets at acquisition (24,000) (11,000)
Goodwill 7,000 2,667 9,667
Impairment to date (3,000) – (3,000)
4,000 2,667 6,667

(4) Non-controlling interest
£ £
Viv Ltd – Share of net assets at acquisition (25% × 24,000 (W2)) 6,000
– Share of post-acquisition (25% × 36,000 (W2)) 9,000
15,000
Neil Ltd – Share of net assets at acquisition (1/3 × 11,000 (W2)) 3,667
– Share of post-acquisition (1/3 × 14,000 (W2)) 4,666
8,333
23,333
(5) Retained earnings

£
Rik Ltd 100,000
Viv Ltd – Share of post-acquisition retained earnings (75% × 36,000 (W2)) 27,000
Neil Ltd – Share of post-acquisition retained earnings (2/3 × 14,000 (W2)) 9,334
Goodwill impairment to date (W3) (3,000)
133,334

CHAPTER 12
Consolidated statements of
financial performance
Introduction
135
Introduction
Other than terminology, there are no significant differences between the consolidated statements of
3 financial performance under IFRS and under UK GAAP. Under IFRS, the consolidated profit and loss
account is called the 'consolidated statement of profit or loss' or the 'consolidated statement of profit or
loss and other comprehensive income' if other comprehensive income is present.
Some question practice is provided in the online Question Bank for revision purposes, available at
icaew.com/examresources.

CHAPTER 13
Associates and joint ventures
Introduction
Topic List
1 Key differences
2 Investments in associates
3 Equity method: consolidated statement of profit or loss
4 IFRS 11, Joint Arrangements
5 Joint operations
6 Joint ventures
7 IFRS 12, Disclosure of Interests in Other Entities
137
Introduction
More complex aspects of group financial statements will be examined at Advanced Level. It is therefore
important that you have a sound understanding of the accounting treatment of associates and joint
ventures to carry forward. There are some differences from UK GAAP, but many of the principles are the
same under IFRS.

2 1 Key differences
Section overview
There are some differences between FRS 102 and IFRS in accounting for associates and joint ventures.
1.1 Associates and joint ventures

FRS 102 IFRS
Implicit goodwill is recognised on acquisition of an No implicit goodwill is recognised or amortised.

interest in an associate or joint venture, being the
difference between the consideration transferred
and the investor's share of the fair value of the net
assets. This amount is then amortised.
FRS 102 does not require such detailed IFRS 12, Disclosure of Interests in Other Entities
information about the investee or about risks specifies disclosure requirements for interests in
associated with the investment. associates and joint ventures.
1 2 Investments in associates
Section overview
 An associate is an entity over which the investor exercises significant influence.
 Significant influence is presumed where the investor holds 20% or more of the voting rights.
 An associate is not part of the group.
 An investment in an associate should be accounted for in the consolidated financial statements
using the equity method of accounting.
2.1 Introduction As UK GAAP

P
In the previous chapters we have seen that where a parent entity controls another entity (normally by A
holding over 50% of the ordinary share capital) it is said to have a subsidiary. The results of the parent R
T
and subsidiary are consolidated in group accounts as if they were a single entity.
However, investments can take a number of different forms. An investing entity may obtain sufficient
shares such that it has significant influence over it, without achieving control. This type of investment
is referred to as an associate and is dealt with by IAS 28, Investments in Associates and Joint Ventures.
In the first part of this chapter we will look at how to account for an associate. D
2.2 Scope and definitions As UK GAAP
IAS 27, Separate Financial Statements is to be applied in accounting for investments in associates in
the investor's own financial statements as an individual company.
So IAS 28 is to be applied in the CFS only. The definition of an associate is as follows.
Key differences: 13 Associates and joint ventures 139

Definitions
Associate: An entity, including an unincorporated entity such as a partnership, over which the investor
has significant influence and that is neither a subsidiary nor an interest in a joint venture.
Significant influence: The power to participate in financial and operating policy decisions of the
investee, but is not control or joint control over those policies.
Points to note
1 A holding of 20% or more of the voting power in an investee (but less than the 51% which
would create a parent/subsidiary relationship) is presumed to provide the investor with that
significant influence, while a holding of less than that is presumed not to do so. Both of these
presumptions are rebuttable on the facts of the case.
2 It is the mere holding of 20% which is sufficient.
3 It is possible for an investee to be the associate of one investor and the subsidiary of another,
because the former investor can still have significant influence when the latter has control. A holder
of more than 75% can do most things in a company, such as passing a special resolution, without
paying much attention to the other shareholders, so someone else holding 20% is unlikely to have
significant influence. But it is always necessary to have regard to the facts of the case.
4 Significant influence is evidenced in a number of ways. It is presumed in the case of a 20%
shareholding but IAS 28 also states that significant influence can be shown by one or more of the
following:
 Representation on the board of directors
 Participation in policy making decisions
 Material transactions between the investor and investee
 Interchange of managerial personnel
 Provision of essential technical information
5 Significant influence may be lost in the same circumstances as a parent may lose control over
what was a subsidiary.
2.3 Equity method

The equity method should be used in relation to associates, the rationale being that it reflects the
significant influence the investor holds by making the investor answerable for the associate's overall
performance, not just for the distributions received. So the investor's share of the associate should be
included in the investor's financial statements.
Under the equity method, the investment in the associate is initially recognised at cost, but the
carrying amount is then increased or decreased by the investor's share in the post-acquisition change
in the associate's net assets.
Shares of post-acquisition profits/losses should be recognised in the investor's consolidated statement of
profit or loss.
When an investment in an associate meets the 'held for sale' criteria of IFRS 5, Non-current Assets Held For
Sale and Discontinued Operations eg, it is expected to be sold within 12 months of acquisition, it is still
classified as an associate, but it is not subject to equity accounting; IFRS 5 is applied instead.
Once significant influence is lost, the investee is no longer an associate, so the investor's statements of
profit or loss should subsequently include only distributions received.
The procedures used in consolidation are applied wherever possible to accounting for associates. So:
 profits and losses on transactions between the investor and the associate should be
eliminated to the extent of the investor's share;
 there are provisions as to reporting dates, adjustments for material transactions when the dates do
not coincide and uniform accounting policies which are very similar to those for subsidiaries;

 recognition of a share of an associate's losses should only result in the investor's interest being
written down below nil (so as to become a liability) if the investor has incurred obligations on
behalf of the associate.
The differences are that as follows:
 There is no cancellation of the investment against the share of the associate's net assets. This
is because there is no line-by-line addition to items in the statement of financial position of the
investor's share of the associate's assets and liabilities. Such addition is appropriate under conditions
of control, but not under those of significant influence. UK GAAP has a goodwill
calculation, but no separate
 There is no goodwill calculation at the date the investment is made.
presentation of goodwill.
 Instead, the investor's interest in the associate is shown in the statement of financial position, as a
single line under non-current assets.
 The whole of that interest is subjected to an impairment review if there is an indicator of
impairment.
 That interest includes items which are in substance a part of the investment, such as long-term
loans to the associate. But short-term receivables which will be settled in the ordinary course of
business remain in current assets.
 The investor's interest in the associate's post-tax profits less any impairment loss is recognised
in its consolidated statement of profit or loss.
Different from UK GAAP, which also
has amortisation of goodwill.
2.4 Investor's separate financial statements

Under IAS 27, the investment in the associate is carried in the investor's statement of financial
position:
Different from UK GAAP, which has cost less
 at cost; impairment, fair value through other
 in accordance with IAS 39/IFRS 9; or comprehensive income or fair value through
profit or loss.
 using the equity method as described in IAS 28.
The only income included in the investor's statement of profit or loss is the amount of distributions
received.
Point to note: It will be made clear in the exam how the associate has been recognised if appropriate.
For examination purposes you should assume that a holding of 20% or more of the ordinary share P
capital constitutes significant influence. A
R
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2.5 Application of the equity method in the consolidated statement of

financial position
Remember that the equity method is only used in group accounts. This means that the parent has
subsidiaries as well as an associate. In an examination question the practical implication of this is that D
you will need to produce the consolidation workings for the subsidiaries (see Chapter 11). These
workings are adapted for the inclusion of the associate as follows:
Working 1: Group structure  Include the associate in the group structure diagram
Working 6: Investment in associate  Cost of investment
 Plus share of post-acquisition retained earnings
 Less any impairment losses to date
Working 5: Consolidated retained earnings  Include the group share of the associate's post-
(reserves) acquisition retained earnings UK GAAP also
 Include any impairment losses to date has
amortisation.
The calculation of the carrying amount of the investment in the associate will usually be
Working 6.

2 3 Equity method: consolidated statement of profit or loss
Section overview
Share of profit of associates should be recognised as a single line entry in the consolidated statement of
profit or loss. This is as for UK GAAP.
3.1 Basic principle – a reminder

The associate should be accounted for as follows:
 The group's share of the associate's profit after tax should be recognised in the consolidated
statement of profit or loss as a single line entry.
 This should be disclosed immediately before the group profit before tax as 'Share of profit of
associates'.
 If the associate is acquired mid-year its results should be time-apportioned.
Points to note
1 It may seem odd to include an after tax amount in arriving at the profit before tax, but this is in
line with the Guidance on Implementing IAS 1, Presentation of Financial Statements.
2 The revenues and expenses of the associate should not be consolidated on a line-by-line basis.
These are more detailed than

UK GAAP and differently
3.2 Disclosures worded.
The minimum disclosures are as follows:
 The fair value for an investment in any associate for which there are published price quotations
(ie, the associate's securities are dealt in on a public market)
 Summarised financial statements of the associate
 Reasons why the investor thinks the 20% presumptions are overcome, if that is the case
 The associate's reporting date, if different from that of the investor
 Restrictions on funds transfers from the associate
 Losses in the associate, both current period and cumulative, which have not been recognised in
the investor's financial statements (because the investment has already been written down to nil)
 The investment to be shown as a non-current asset in the statement of financial position
 The investor's share of the associate's:
– after-tax profits, to be shown in the investor's statement of profit or loss
– discontinued operations
– changes in equity recognised directly in equity, to be shown in other comprehensive income
in the investor's statement of profit or loss and other comprehensive income
– contingent liabilities

1 4 IFRS 11, Joint Arrangements
Section overview
 IFRS 11 classifies joint arrangements as either joint operations or joint ventures.
 There must be a contractual arrangement for a joint arrangement to exist
 The definitions are different under IFRS from UK GAAP
4.1 What is a joint arrangement?
Definition
Joint arrangement: A contractual arrangement whereby two or more parties undertake an economic
activity that is subject to joint control.
The key characteristics of a joint arrangement are that:

 the parties have a contractual agreement between themselves; and
 the agreement results in them having joint control over the shared activities.
Definitions
Joint control: The contractually agreed sharing of control over an arrangement, which exists only when
the decisions about the relevant activities require the unanimous consent of the parties sharing control.
A party to a joint arrangement is an entity that participates in a joint arrangement, regardless of
whether that entity has control of the arrangement.
4.2 Context
Entities often operate together as strategic alliances to overcome commercial barriers and share risks.
These alliances are often contractually structured as joint arrangements. The objective of a joint P
arrangement may be to carry out a one-off project, to focus on one area of operations or to develop A
new products jointly for a new market. The joint arrangement focuses on the parties' complementary R
T
skills and resources. The creation of synergies amongst the parties creates value for each. Joint
arrangements provide the opportunity for organisations to obtain a critical mass and more competitive
pricing.
There are many factors critical to the success of joint arrangements, the most important being the
relationship between the parties. It is essential that all contractual terms and arrangements are agreed in
D
advance including the process for resolving disputes. An exit strategy should be developed and the
terms for dissolution agreed between the parties at the outset. It is particularly important that the
agreement identifies the party which will at dissolution retain any proprietary knowledge held within the
joint arrangement.
The different joint arrangement structures available provide challenges for financial reporting. The
unique risks of joint arrangements need to be readily apparent to users of financial statements, since
their financial and operational risks may be substantially different from those of other members of the
reporting group.

4.3 Forms of joint arrangement
IFRS 11, Joint Arrangements identifies, and deals with, two types of joint arrangement:
 Joint operations
 Joint ventures
Only joint ventures are included in the FAR syllabus.
Similar to 'jointly controlled operations' under UK

5 Joint operations GAAP.
Section overview
 A joint operation is structured differently from a joint venture.
5.1 What is a joint operation?

This is a joint arrangement whereby the parties that have joint control (the joint operators) have rights
to the assets and obligations for the liabilities of that joint arrangement.
A joint arrangement that is not structured through a separate entity is always a joint operation.
If the arrangement is structured through a separate entity it may be either a joint operation or a joint
venture. Classification depends upon the rights and obligations of the parties to the arrangement
The substance of this type of joint arrangement is that each party is carrying on its own activities as a
separate part of its own business and the accounting procedures reflect this.
A party to a joint operation will recognise its share of the assets, liabilities, revenue and expenses of the
joint operation.
Similar to 'jointly controlled entities' under UK

6 Joint ventures GAAP.
Section overview
 Joint ventures are separate legal entities, so they should prepare their own financial statements.
 In the consolidated statements of the venturer the results and position of the joint venture should
be included using the equity method of accounting.
 The equity method of accounting is the same as that used for accounting for associates in
accordance with IAS 28, Investments in Associates and Joint Ventures.
6.1 What is a joint venture?

This is a joint arrangement whereby the parties that have joint control of the arrangement have rights
to the net assets of the arrangement.
The key identifying factor for a joint venture is that in this type of arrangement a separate legal entity
is set up, with the ownership of that entity being shared by the venturers.
This separate entity may be a:
 company; or
 partnership.
As a separate legal entity the joint venture can enter into contracts and raise finance in its own name. It
will maintain its own accounting records and prepare its own financial statements.
The joint venture will own its own assets, incur its own liabilities, incur its own expenses and earn its
own income.

Normally each joint venturer will be entitled to a pre-determined share of the profits made by the joint
venture.
An investor in a joint venture is a party to a joint venture that does not have joint control over that joint
venture. If the investor has significant influence, he should account for his investment in accordance
with IAS 28. If he does not have significant influence he should account for it as a financial asset.
Worked example: Joint venturers and investors

An entity is established to build a sports stadium for a customer. Once the stadium is built, the entity
will be wound up.
Eight contractors invest in the equity of the entity. Contractors 1 to 5 own 14% each and contractors 6
to 8 own 10% each. There is a contractual arrangement whereby all relevant decisions are taken
unanimously by contractors 1, 2, 3 and 8.
Do these arrangements give rise to a joint venture? If so, who are the venturers and who are the
investors?
Solution
The contractual agreement provides for joint control. The contractors who are parties to the contractual
agreement are Contractors 1, 2, 3 and 8. Between them they own 52% ((3  14%) + 10%) of the entity
and the contractual agreement provides that decisions are taken unanimously by them, so they have
joint control over it. There is a joint venture as far as they are concerned and they are venturers.
The other contractors are not involved in the contractual arrangement and therefore are only investors
in the joint venture.
A contractual arrangement will usually be in writing either as a formal document or in the form of
minutes from a meeting. It will normally cover the purpose of the joint venture, its expected duration,
any financial reporting requirements, appointments to the managing committee, voting rights, capital
contributions, procedures for running the day to day operations and how expenses and income are to
be shared.
6.2 Accounting for joint ventures P

A
IFRS 11 requires each venturer in a joint venture to recognise in its consolidated financial statements
R
its share of the venture using the equity method of accounting. This is the same as UK GAAP. T
6.3 Investor's separate financial statements

In the investor's separate financial statements the investment in the joint venture should be carried:
 at cost;
Different from UK GAAP, which has cost less D
 in accordance with IAS 39; or
impairment, fair value through other
 using the equity method as in IAS 28. comprehensive income or fair value through
profit or loss.
6.4 Equity method of accounting

You have used the equity method of accounting when accounting for associates under IAS 28.
Under the equity method:
 the investment in the joint venture is initially recorded at cost;
 there are adjustments each period for the venturer's share of the post-acquisition reserves of the
joint venture, less any impairment losses. Profits are added to the investment and losses deducted;
 in the venturer's consolidated statement of financial position the investment in the joint venture
is shown as a single line figure as part of non-current assets;

 in the venturer's consolidated statement of profit or loss there is a single line for the share of the
joint venture's results; and
 the group share of the joint venture's other comprehensive income will be included in the
consolidated statement of profit or loss and other comprehensive income.
Worked example: Joint venture

AB controls a number of subsidiaries and therefore prepares consolidated financial statements.
AB is also a venturer in JV, a joint venture in which AB owns 25%. AB acquired its share of JV at a cost of
£1 million on the creation of JV. At that time JV had net assets of £4 million.
A summarised draft statement of financial position of the AB Group (AB and its subsidiaries, but not its
interest in JV), and JV is as follows:
AB Group JV
£m £m
Non-current assets
Property, plant and equipment 60 20
Intangibles 30 8
Investment in JV 1 0
Current assets
Inventories 50 16
Other 80 24
Current liabilities (90) (36)
131 32
Equity
£m
The equity in AB Group plus JV can be calculated as:
AB Group 131
JV post-acquisition ((32 – 4)  25%) 7
138
Requirement
Using the equity method prepare the AB Group consolidated statement of financial position including
JV.
Solution
£m
Non-current assets
Property, plant and equipment 60
Intangibles 30
Investment in JV (cost £1m plus 25%  increase in retained reserves [£28m]) 8
98
Current assets
Inventories 50
Other 80
228
Equity and liabilities
Equity 138
Current liabilities 90
228

3 7 IFRS 12, Disclosure of Interests in Other Entities
Section overview
IFRS 12 sets out the disclosure requirements for associates and joint ventures. These are more detailed
than under UK GAAP.
7.1 Significant judgements and assumptions

IFRS 12 sets out the sort of facts that would be made regarding significant judgements and assumptions
(and changes to those judgements and assumptions) regarding an entity. The focus would be on how
the entity concluded that it controlled another entity or how it determined that it had joint control
and/or was a party to a joint arrangement, and what the nature of the joint arrangement was. For
example, disclosures might discuss why or how an entity does not control another entity even though it
holds more than half of the voting rights of the other entity, or how and why it does control another
entity even though it holds less than half of the voting rights of the other entity.
7.2 Disclosures
The following disclosures are required in respect of associates and joint arrangements:
 Nature, extent and financial effects of an entity's interests in associates or joint arrangements,
including name of the investee, principal place of business, the investor's interest in the investee,
method of accounting for the investee and restrictions on the investee's ability to transfer funds to
the investor.
 Risks associated with an interest in an associate or joint venture
 Summarised financial information, with more detail required for joint ventures than for associates
P
A
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CHAPTER 14
Group accounts: disposals
Introduction
149
Introduction
2 This topic is introduced in Financial Accounting and Reporting at a basic level – only complete disposals
are covered. More complex aspects are covered at Advanced Level.
There are no differences from UK GAAP other than the terminology and presentation matters already
covered. The working for group profit on disposal reflects the differences relating to calculation of
goodwill covered earlier:
£ £
Sales proceeds X
Less: Carrying amount of goodwill at date of disposal:
Consideration transferred X
NCI at acquisition X
Less net assets at acquisition (X)
Goodwill at acquisition X
Less impairment to date (X)
(X)
Less: Carrying amount of net assets at date of disposal
Net assets b/f X
Profit/(loss) for current period to disposal date X/(X)
Dividends paid before disposal date (X)
(X)
Add back NCI in net assets at date of disposal X
Profit (loss) on disposal X (X)
Question practice can be found in the online Question Bank, available at icaew.com/examresources.

CHAPTER 15
Group statement of cash

flows
Introduction
151
Introduction
3 Other than terminology, there are no differences between UK GAAP and IFRS relating to statements of
cash flows.
Question practice is provided in the online Question Bank, available at icaew.com/examresources.

PART E
IFRS with no UK equivalent:

Earnings per share
Introduction
Topic List
1 IFRS 8, Segment Reporting and IFRS 13, Fair Value Measurement
2 IAS 33, Earnings per Share
153
Introduction
Certain IFRS have no direct equivalent in FRS 102, mainly because FRS 102 deals with smaller companies
and the standards relate to larger ones. Examples are:
 IAS 33, Earnings per Share
 IFRS 8, Operating Segments
 IFRS 13, Fair Value Measurement
Of these, IAS 33 is the most important as assumed knowledge for Corporate Reporting, because IFRS 8
and 13 are covered in full in the Advanced Level paper. (Some of the basic aspects of IFRS 13 are
introduced in Chapter 8 of this Supplement, on financial intstruments.) FRS 102 Section 1.4 requires an
entity whose shares are publicly traded to apply IAS 33, Earnings per Share.

1 IFRS 8 and IFRS 13
Section overview
 IFRS 8 requires disclosure of segmental information.
 IFRS 13 provides a single IFRS framework for measuring fair value and requires disclosures about
fair value measurement.
1.1 IFRS 8, Operating Segments

IFRS 8, Operating Segments requires particular classes of entities (essentially those with publicly traded
securities) to disclose information about their operating segments, products and services, the
geographical areas in which they operate, and their major customers. Information is based on internal
management reports, both in the identification of operating segments and measurement of disclosed
segment information.
IFRS 8 was not examinable at FAR: IFRS and so will be covered in full for the first time at Advanced Level
CR. It is therefore not covered here.
1.2 IFRS 13, Fair Value Measurement

IFRS 13, Fair Value Measurement applies to IFRSs that require or permit fair value measurements or
disclosures and provides a single IFRS framework for measuring fair value and requires disclosures about
fair value measurement. The Standard defines fair value on the basis of an 'exit price' notion and uses a
'fair value hierarchy', which results in a market-based, rather than entity-specific, measurement.
At FAR: IFRS, IFRS 13 was only covered/tested in the context of financial instruments. Accordingly more
detail is given in Part D Chapter 8 of this Supplement.
2 IAS 33, Earnings per share
Section overview
 Basic earnings per share (EPS) is calculated as the profit or loss attributable to the ordinary equity
holders divided by the number of shares in issue.
 IAS 33 is only mandatory for listed entities.
 FRS 102 Section 1.4 requires an entity whose shares are publicly traded to apply IAS 33, Earnings
per Share, so although there is no equivalent UK standard, you will have come across EPS in your
earlier studies.
2.1 Context
One of the most commonly used performance measures worldwide is basic earnings per share (EPS),
which is calculated as the profit or loss attributable to the ordinary equity holders divided by the P
A
number of shares in issue. R
In addition to being an important independent measure, it also is a component in the price earnings T
(P/E) ratio which often forms a pivotal role in the valuation of businesses. A meaningful comparison
between entities, or against a benchmark figure, can only be made where entities measure their EPS
figure on a consistent basis. IAS 33 prescribes what that consistent basis should be.
Standard EPS calculations assist in comparisons which are meaningful across entities, but they take
account of all income and expenses that have been reported during the period, whether or not they are E
likely to recur in the future. These calculations provide a historical performance measure and do not
purport to provide a measure of future performance. So entities frequently present alternative forms of
EPS, based on income and expenses which have been adjusted to exclude non-recurring items; entities
generally refer to the adjusted profit figure as 'maintainable earnings'. Industry or market standard EPS
Part E: IFRS with no UK equivalent: Earnings per share 155

figures are also often reported. Both of these additional performance measures are claimed to provide a
more realistic measure of the entity's performance in future periods.
Compliance with IAS 33 is mandatory for:
 the separate financial statements of entities whose ordinary shares are publicly traded or are in the
process of being issued in public markets; and
 the consolidated financial statements for groups whose parent has shares similarly traded/being
issued.
Other entities need not present EPS (because their shares are not traded, there is no readily available
market price which can be used to calculate the P/E ratio), but if they do voluntarily, they should
comply with IAS 33.
IAS 33 requires the EPS to be presented in the statement of profit or loss.
2.2 Calculation
The calculation for basic EPS is profit or loss divided by the number of shares in issue.
The fully worded calculation is:
Profit/(loss) attributable to ordinary equity holders of the parent
Weighted average number of ordinary shares outstanding during the period
Shares are usually included in the weighted average number of shares from the date any consideration
for them is receivable by the issuer. This is generally the date of their issue.
Point to note: The need for a weighted average number of shares is explained later in section 2.4.
2.3 Calculating earnings

The earnings figure to be used is the profit or loss attributable to the ordinary equity holders. The
statement of profit or loss presents the profit attributable to the owners of the entity. Usually this will be
the amount attributable to ordinary equity holders, but in some cases a deduction should be made for
the amount attributable to preference equity holders.
Whether such a deduction is needed depends upon the type of preference share:
 Redeemable preference shares should be classified as liabilities and the finance charge relating to
them (both dividend and any premium on redemption adjustment) should already have been
recognised in profit or loss as part of finance charges. No adjustment is needed.
 Some irredeemable preference shares are classified as equity and the dividend is deducted in the
statement of changes in equity. An adjustment is needed; the dividend should be deducted from
the profit figure taken from the statement of profit or loss to arrive at the profit attributable to the
ordinary equity holders.
Interactive question 1: Dividend on irredeemable preference shares presented as

equity
£m
Profit for the period 2,177
Attributable to:
2,177
Dividends presented in statement of changes in equity
On irredeemable preference shares 400
On ordinary shares 600
The weighted average number of ordinary shares in issue is 6,241 million.

Requirement
Calculate the basic EPS.
£m
Profit attributable to owners of the parent
Less: dividend on irredeemable preference shares
Profit attributable to ordinary equity holders of the parent
EPS =
2.3.1 Cumulative dividends on irredeemable preference shares presented as equity

If the dividends on such shares are cumulative, any dividend not paid in the current year (due, for
example, to lack of distributable profits) will be payable in subsequent years when distributable profits
become available. All such arrears need to be paid off before any ordinary share dividend is paid.
The treatment of such cumulative dividends for EPS purposes is as follows.
 If the dividend is not paid in the year, then it should still be deducted from profit.
 When the arrears of dividend is subsequently paid, it should be excluded from the EPS calculation.
Interactive question 2: Cumulative dividend on irredeemable preference shares

presented as equity
£m
88
Profit for the period
Attributable to:
Owners of the parent 82
Non-controlling interest 6
88
Dividends presented in statement of changes in equity
On irredeemable preference shares (Note) 20
On ordinary shares 5
Note: This figure includes £15 million in respect of arrears of cumulative dividend not paid in previous
years due to lack of distributable profits.
The weighted average number of ordinary shares is 1,200 million.
Requirement
Calculate the basic EPS.
£m
Profit P
Less dividend on irredeemable preference shares A
Profit attributable to ordinary equity holders of the parent R
T
EPS =

2.4 Calculating the weighted average number of ordinary shares
If no additional shares have been issued during the year, or repurchased, there are no complications; the
number of shares in issue at the start (or end) of the period is used.
If additional shares have been issued during the current period, the calculation of the weighted average
number of shares depends upon whether:
 the resources of the entity have increased, for example an issue of shares for cash at full market
price; or
 The resources of the entity have not changed, for example a bonus issue.
If shares are repurchased during the period (treasury shares), the weighted average number of shares
will again depend on whether:
 the repurchase was at market price; or
 the repurchase was other than at market price.
2.5 Issue of shares for cash at full market price

Where shares are issued during the period for cash at full market price, the cash received is an increase
in the resources of the entity. These additional resources will only have been available to increase
earnings (the numerator in the EPS fraction) for part of the period, so the additional shares should only
be included in the shares in issue (the denominator of the fraction) for part of the period. The number
of new shares is 'weighted' for the proportion of the period they have been in issue.
Point to note: An issue of shares in an acquisition at market value is equivalent to an issue of shares for
cash in these calculations.
The weighted average number of shares is calculated as follows.
 Start with the number of shares in issue at the start of the year and time-apportion it for the
period up to the date the new shares were issued.
 Take the number of shares in issue after the new shares were issued and time-apportion it for the
period after the date of issue.
 The total of these two is the weighted average number of shares in issue over the year.
Worked example: Issue of shares for cash at full market price

X plc has 10 million ordinary shares in issue at 1 January 20X4. Its accounting year end is 31 December.
During 20X4 the following events occur:
1 April 20X4 2 million shares are issued to acquire a subsidiary
1 October 20X4 2 million shares are issued at full market price
What is the weighted average number of ordinary shares outstanding during the period?
Solution
The weighted average number of ordinary shares is calculated as follows.
Weighted Av
(million)
January to March 10 million  3/12 = 2.5
April to September 12 million  6/12 = 6.0
October to December 14 million  3/12 = 3.5
12.0

2.6 Bonus issue
When a bonus issue is made:
 additional shares are issued to the ordinary equity holders in proportion to their current
shareholding, for example one new share for each five shares already owned;
 no cash is received for these shares; and
 reserves are capitalised by a debit to share premium/retained earnings.
In this case the issuing entity has not received any additional resources to help increase earnings. Each
shareholder has more shares, but still has the same proportionate interest in the entity. As an example, a
shareholder owning 100,000 shares out of the 1 million in issue has a 10% interest. If the entity makes a
1 for 2 bonus issue, the shareholder will own 150,000 shares out of the 1.5 million now in issue, still a
10% interest.
For a bonus issue the treatment for the weighted average number of shares is to assume that the shares
have always been in issue. This means that they should be treated as having been issued at the start of
the earliest period for which results are reported, usually the start of the year presented as the
comparative figures.
Worked example: Bonus issue

X plc has 10m ordinary shares in issue at 1 January 20X3. Its accounting year end is 31 December.
Earnings:
£m
20X4 13
20X3 10
Two million bonus shares are issued on 1 October 20X4.
What basic EPS amount was presented in the 20X3 financial statements and what two basic EPS
amounts should be presented in the 20X4 financial statements?
Solution
20X3 financial statements: EPS (£10m/10m shares) 100p
20X4 financial statements:
Basic EPS for both years should be calculated as if the bonus shares had always been in issue.
Basic EPS for 20X4 (£13m/(10 + 2)m) 108.3p
Basic EPS for 20X3 (£10m/(10 + 2)m) 83.3p
Point to note: An alternative adjustment to the 20X3 basic EPS as originally stated would be to multiply
it by (shares before bonus/shares after bonus), so 100p  (10m/12m) = 83.3p
Interactive question 3: Bonus issue

At 1 January 20X4 and 1 January 20X5 X plc had in issue 20 million ordinary shares. P
During 20X5 the following events took place. A
R
31 May 20X5 Issue of 6 million shares for cash at full market price T
30 September 20X5 Bonus issue of 1 for 2
Earnings for the year ended 31 December 20X4 were £6m and for the year ended 31 December 20X5
were £8 million.
Requirements
E
(a) Calculate the basic EPS originally reported in 20X4.
(b) Calculate the basic EPS reported in 20X5 including comparative.

2.7 Rights issue
A rights issue is:
 an issue of shares for cash to the existing ordinary equity holders in proportion to their current
shareholdings; and
 at a discount to the current market price.
Because the issue price is below the market price, a rights issue is in effect a combination of an issue at
full value and a bonus issue.
In order to calculate the basic EPS number of shares when there has been a rights issue, an adjustment
for the bonus element is required:
Adjustment = Pre-rights fair value of shares
Theoretical ex-rights fair value
The pre-rights issue price (or fair value) of the shares is the market price immediately before the rights
issue is announced. The theoretical ex-rights fair value is the theoretical price at which the shares would
trade after the rights issue and takes into account the diluting effect of the bonus element in the rights
issue. For the purpose of these learning materials, the term 'theoretical ex-rights price', otherwise known
as TERP, is used as an equivalent recognised term.
The adjustment is used to increase the number of shares in issue before the rights issue for the bonus
element.
Point to note: The TERP is used because the market price at which the shares trade after the rights issue
takes account of other factors; for example, it will go up above the TERP if investors interpret the rights
issue as a positive sign for the development of the issuing company, and go down below it if they
interpret it as a negative sign.
Worked example: TERP

A 1 for 3 rights issue is made at 132p when the market price is 220p.
What is the TERP?
Solution
No. Price Total
p p
Pre-rights issue holding 3 220 660
Rights share 1 132 132
4 792
TERP (792/4) = 198p

Point to note: To prove that a rights issue is a combination of an issue at full market price and a bonus
issue, consider the effect if instead of this rights issue, an issue of 1 for 8 had been made at the full
market price of 220p, followed immediately by a 1 for 9 bonus:
No. Price Total
p p
Initial holding 8 220 1,760
Issue at full market price 1 220 220
Revised holding 9 1,980
Bonus issue 1 N/A 0
Revised holding 10 1,980
Theoretical price (1,980/10) = 198p

Worked example: EPS following a rights issue
The following information is available for an entity.
£
Earnings
20X2 1,000,000
20X3 1,300,000
20X4 1,500,000
Number of shares in issue at 1 January 20X2: 800,000
Rights issue: 1 for 4 at £5 each on 1 April 20X3 when the market value was £7
What are the basic EPS amounts for each of the three years after adjustment for the rights issue?
Solution
Computation of theoretical ex-rights price (TERP):
No. Price Total
p p
Pre-rights issue holding 4 700 2,800
Rights share 1 500 500
5 3,300
3,300
Therefore TERP = = 660p
5
Computation of bonus adjustment factor:
Value of shares before rights 700p
Adjustment = =
TERP 660p
Computation of EPS:
20X2
Earnings £1m/(800,000 shares  (700/660)) = 117.9p
20X3
Earnings = £1.3m
Total
Weighted average shares
1 Jan – 31 Mar 800,000  700/660  3/12 212,121
1 Apr – 31 Dec 800,000  ((4 + 1)/4)  9/12 750,000
962,121
£1.3m
Basic EPS = 135.1p
962,121
£1.5m
20X4 Basic EPS = 150.0p
(800,000 × (4 + 1) / 4)
Interactive question 4: Rights issue P

A
At 1 January 20X8 and 1 January 20X9 Box plc had in issue 10 million ordinary shares. On R
30 June 20X9 Box plc made a 1 for 4 rights issue at £2.40 per share. At that date the market price T
before the issue was announced was £3.20 per share. The earnings of the company were £4 million for
20X8 and £4.8 million for 20X9.
Requirement
Calculate the reported basic EPS for 20X9 (including the comparative). E

2.8 Repurchase of shares
When shares are repurchased and held as treasury shares the number of shares in issue reduces but
share capital remains unchanged as the treasury shares are shown in a separate reserve. An adjustment
therefore needs to be made when calculating the weighted average number of shares as part of the EPS
calculation.
If the shares are repurchased at market price, the resources expended on the repurchase are
commensurate with the reduction in the number of shares. If the shares are repurchased for a price
above market value, the resources expended will exceed the reduction in the number of shares. This
reduces EPS and so the prior year EPS must be adjusted to reflect this.
In the exam a share repurchase will always be at market price.
Worked example: Weighted average following repurchase

An entity had 10 million £1 ordinary shares in issue at 1 January 20X8 and on 30 September 20X8
entered into a repurchase arrangement to buy back two million £1 ordinary shares at market price. The
repurchased shares are recognised in a separate reserve as treasury shares.
What is the number of shares that will be used to calculate EPS at 31 December 20X8?
Solution
The weighted average number of shares will be calculated as follows:
10 million × 9/12 7,500,000
8 million × 3/12 2,000,000
9,500,000
Share-based payment transactions can be any of the following:

(a) Equity-settled share-based payment transactions, in which the entity:
 receives goods or services as consideration for its own equity instruments (including shares or
share options); or
 receives goods or services but has no obligation to settle the transaction with the supplier.
(b) Cash-settled share-based payment transactions, in which the entity acquires goods or services by
incurring a liability to transfer cash or other assets to the supplier of those goods or services for
amounts that are based on the price (or value) of the entity's shares or other equity instruments of
the entity or another group entity.
(c) Transactions in which the entity receives or acquires goods or services and the terms of the
arrangement provide either the entity or the supplier of those goods or services with a choice of
whether the entity settles the transaction in cash (or other assets) or by issuing equity instruments.


£m
Profit attributable to owners of the parent 1,897
Less dividend on irredeemable preference shares (400)
Profit attributable to ordinary equity holders of the parent 1,497
1,497
EPS = = 24p per share
6,241

£m
Profit attributable to owners of the parent 82
Less one year's dividend on irredeemable preference shares (20 – 15) (5)
Profit attributable to ordinary equity holders of the parent 77
77
EPS = = 6.4p per share
1,200

(a) EPS originally reported in 20X4 (£6m/20m) = 30p
(b) EPS reported in 20X5
The bonus issue is treated as having been issued at the start of 20X4 (the earliest reported period).
The adjusted weighted average number of shares for 20X4 is (20m  (2 + 1)/2) = 30m
The restated 20X4 EPS is (£6m/30m) = 20p
EPS for 20X5
Weighted average shares:
As the bonus issue came after the issue for cash at full market price, the 6 million new shares rank
for the bonus issue.
Weighted Av
(million)
1 January – 31 May 20m  (2 + 1)/2  5/12 12.50
1 June – 31 December (20m + 6m)  ((2 + 1)/2)  7/12 = 22.75
35.25
EPS (£8m/35.25m) = 22.7p

Computation of theoretical ex-rights price (TERP). P
A
No £ R
Pre-rights issue holding 4 @ 3.20 12.80 T
Rights share 1 @ 2.40 2.40
5 15.20
£15.20
TERP = = £3.04
5
E
Computation of bonus adjustment factor:
Value of shares before rights 320p
Adjustment = =
TERP 304p

Computation of basic EPS:
£4m
20X8 EPS = = 38.0p
(10m shares × (320 304))
20X9 Earnings = £4.8 million
Total
Weighted average shares
1 Jan – 30 June 10m  320/304 × 6/12 5,263,158
1 July – 31 Dec 10m  ((4 + 1)/4) × 6/12 6,250,000
11,513,158
£4.8m
EPS = = 41.7p
11,513,158

PART F
Model financial statements
Topic List
1 Model financial statements: IFRS
165
2 1 Model financial statements using IFRS P
A
R
Section overview T
 Key areas of difference under UK GAAP are highlighted by means of callouts.
1.1 Statement of profit or loss and other comprehensive income

F
SPECIMEN PLC
Statement of profit or loss for the year ended 31 March 20X6
Notes £'000
'Turnover' in UK
2 Revenue GAAP X
Cost of sales (X)
Gross profit X
Other income X
Distribution costs (X)
Administrative expenses (X)
3 Profit/(loss) from operations X/(X)
4 Finance costs (X)
5 Investment income Separate column in X
Profit/(loss) before tax UK GAAP X/(X)
Profit/(loss) for the year from continuing operations X/(X)
20 Profit/(loss) for the year from discontinued operations (X)
Profit/(loss) for the year X/(X)
SPECIMEN PLC
Statement of profit or loss and other comprehensive income for the year ended 31 March 20X6
£'000
Profit/(loss) for the year X/(X)
Gains on property revaluation X
Income tax relating to components X
O of other comprehensive income (X)
Other comprehensive income for the year net of tax X
Total comprehensive income for the year X
Note: Revaluation gains and losses are the only items of other comprehensive income included in the
syllabus and it is unlikely that you will be given tax amounts relating to these, so any statement of profit
or loss and other comprehensive income in the exam will be relatively straightforward.
Part F: Model financial statements 167

1.2 Statement of financial position
SPECIMEN PLC
Statement of financial position as at 31 March 20X6
Notes £'000 £'000
ASSETS
Non-current assets
6 Property, plant and equipment X
7 Intangibles X
Investments X
X
Current assets
8 Inventories X
Trade and other receivables X
Investments X
Cash and cash equivalents X
X
20 Non-current assets held for sale X
Net assets less current X
Total assets liabilities in UK GAAP X
Equity
9 Ordinary share capital X
9 Share premium account X
6 Revaluation surplus X
Treasury shares (X)
Shares to be issued X
Other reserves X
10 Retained earnings X
Total equity X
11 Preference share capital (redeemable) X
12 Finance lease liabilities X
13 Borrowings X
X
Current liabilities
Trade and other payables X
Dividends payable X
Taxation X
20 Liabilities held for sale X
14 Provisions X
13 Borrowings Equity (share capital and X
reserves) only in UK
12 Finance lease liabilities X
GAAP
X
Total equity and liabilities X
Date authorised by the Executive Board for issue.

1.3 Statement of cash flows
P
A
SPECIMEN PLC R
Statement of cash flows for the year ended 31 March 20X6 T
Notes £'000 £'000

Cash flows from operating activities
21 Cash generated from operations X
Interest paid (X)
Income taxes paid (X) F
Net cash from operating activities X

Cash flows from investing activities
Purchase of property, plant and equipment (X)
Proceeds from sale of property, plant and equipment X
Interest received X
Dividends received X
Net cash used in investing activities (X)
Cash flows from financing activities
Proceeds from issue of share capital X
Proceeds from issue of long-term borrowings X
Dividends paid (X)
Net cash used in financing activities (X)
Net increase in cash and cash equivalents X
Cash and cash equivalents at beginning of period X
22 Cash and cash equivalents at end of period X
1.4 Statement of changes in equity

SPECIMEN PLC
Statement of changes in equity for the year ended 31 March 20X6
Ordinary
share Share Revaluation Retained
capital premium surplus earnings Total
£'000 £'000 £'000 £'000 £'000
At 1 April 20X5 X X X X X
Changes in equity
Issue of share capital X X – – X
Dividends – – – (X) (X)
Total comprehensive income
for the year – – X X X
Transfer to retained earnings – – (X) X –
At 31 March 20X6 X X X X X
1.5 Notes to the financial statements

1 Accounting policies
(a) Accounting convention
The financial statements are prepared in accordance with International Financial Reporting
Standards and under the historical cost convention, modified to include the revaluation of
freehold and long leasehold land and buildings.

(b) Intangibles
Goodwill is the difference between the fair value of the consideration transferred plus the
value of any non-controlling interest and the aggregate of the fair values of the identifiable
assets and liabilities. It is subject to annual impairment reviews. Amortised in UK GAAP
Development expenditure is recognised as an intangible asset to the extent it is expected to
generate future economic benefits. It is amortised over its useful life, typically five years.
(c) Property, plant and equipment
Non-current asset properties are valued at least every three years, and in intervening years if
there is an indication of a material change in value.
Surpluses on valuations of freehold and long leasehold non-current asset properties are
recognised directly in equity in the revaluation surplus, and any deficits below original cost are
recognised in profit or loss.
Plant and equipment is carried at cost.
Any plant and equipment expected to be sold within 12 months of the decision to dispose of
it is reclassified as assets held for sale, presented separately in the statement of financial
position. It is carried at the lower of its carrying amount at the date of the decision to sell and
fair value less costs to sell. Any write-down is shown as an impairment loss.
(d) Depreciation
Depreciation is recognised in respect of property, plant and equipment other than freehold
land and assets classified as held for sale, at rates calculated to write off the cost or valuation,
less estimated residual value, of each asset evenly over its expected useful life, as follows:
 Freehold buildings – over 50 years
 Leasehold land and buildings – over the lease term
 Plant and equipment – over 5 to 15 years
The depreciation methods and the useful lives and residual values on which depreciation is
based are reviewed annually.
(e) Leased assets
Assets held under finance leases are included in property, plant and equipment at their fair
value and depreciated over their useful lives. Lease payments consist of capital and interest
elements and the interest is recognised in profit or loss. The annual rentals in respect of
operating leases are recognised in profit or loss.
(f) Borrowings
Borrowings are recognised at the proceeds received. Preference shares which are redeemable
on a specific date are classified as long-term liabilities, while the dividends relating to them are
recognised in the finance cost in profit or loss.
(g) Provisions
Provisions are recognised when the company has a present obligation which will result in an
outflow of resources. Restructuring provisions mainly comprise lease termination penalties and
employee termination payments.
(h) Revenue
Sales are recognised on delivery of the goods to customers and on the performance of
services for customers. They are shown net of VAT and discounts.
(i) Research costs
Research costs are recognised in profit or loss as incurred. Some development costs are
capitalised (see (b) above).
(j) Inventories
The cost of inventories comprises all costs of purchase and conversion and other costs
incurred in bringing them to their present location and condition. The FIFO cost formula is
applied.

2 Revenue
£'000 P
Sale of goods X A
Performance of services X R
X T
3 Profit/loss from operations

Profit/loss from operations is shown after charging/crediting:
£'000
Research and development costs X F
Depreciation of property, plant and equipment X
Profit/loss on disposal of property, plant and equipment (X)
Impairment of assets held for sale X
Impairment of goodwill X
Amortisation of development costs X
Operating lease payments X
Employee benefits X
Cost of inventories sold, included in cost of sales X
4 Finance costs
£'000
Interest on borrowings X
Dividends on redeemable preference shares X
Interest on finance lease liabilities X
X
5 Investment income
£'000
Interest X
Dividends X
X

Properties
Plant
Free- Long Short Under and
hold leasehold leasehold construction equipment Total
£'000 £'000 £'000 £'000 £'000 £'000
Cost or valuation
At 1 April 20X5 X X X X X X
Revaluation surplus X – – – – X
Additions X X X X X X
Acquired in business – – X – – X
combination
Transfers X – – (X) – –
Classified as held for sale – – (X) – (X) (X)
Disposals (X) (X) (X) – (X) (X)
At 31 March 20X6 X X X X X X
Depreciation
At 1 April 20X5 (X) (X) (X) – (X) (X)
Classified as held for sale – – X – X X
Disposals X X X – X X
Charge for year (X) (X) (X) – (X) (X)
At 31 March 20X6 (X) (X) (X) – (X) (X)
Carrying amount
The carrying amounts at 31 March 20X6 on the historical cost basis were £X for freehold properties
and £X for long leasehold properties.
Non-current asset properties were revalued as follows.

Freehold properties were revalued on 1 April 20X5 by Messrs Tottitup, an independent firm of
Chartered Surveyors, at £X, on the basis of existing use value. Open market value is not considered
to be materially different to existing use value.
Long leases were revalued in 20X4 at £X by Messrs Tottitup, Chartered Surveyors, on the basis of
open market value. In the directors' opinion, there has been no indication of a material change in
value during the year.
The carrying amount of plant and equipment of £X includes an amount of £Y in respect of assets
held under finance leases.
7 Intangibles
Development
Goodwill costs Total
£'000 £'000 £'000
Cost
At 1 April 20X5 X X X
Additions during year X X X
At 31 March 20X6 X X X
Amortisation/impairment
Charge for the year X X X
Carrying amount
8 Inventories
£'000
Raw materials and consumables X
Work in progress X
Finished goods and goods for resale X
X
9 Ordinary share capital

Authorised Issued and fully paid
Ordinary shares of 50p each Number £'000 Number £'000
At 1 April 20X5 X X X X
Issued during the year X X X X
At 31 March 20X6 X X X X
On 30 December 20X5 X ordinary shares were issued fully paid for cash at a premium of Xp per
share.
As described in Note 19, X ordinary shares were issued at a premium of Xp per share in the
acquisition of the trade and assets of A Ltd.
10 Retained earnings
The restatement of the balance brought forward is to correct an error arising out of the
overvaluation of inventories at 31 March 20X4. The effect on the profit for the year ended
31 March 20X5 was £X. Comparative information has been adjusted accordingly.
11 Preference share capital
The 10% preference shares of £1 carry no voting rights and are redeemable at par on
31 March 20Z5 (in 21 years' time). Dividends are paid half-yearly and on a winding up these shares
rank ahead of the ordinary shares.

12 Finance lease liabilities
P
The minimum lease payments on finance leases are as follows: A
Minimum R
lease Present T
payments value
£'000 £'000
Within one year X X
Two to five years X X
More than five years X X
X X F
Future finance charges (X) –
Present value X X
Being:
Current liabilities X
Non-current liabilities X
X
13 Borrowings
Borrowings comprise:
£'000
Bank loans and overdrafts X
Debentures X
X
Being:
Current liabilities X
Non-current liabilities X
X
The debentures have a coupon of 11% and are redeemable at par on 31 March 20Z5.
The bank loans are secured by a fixed charge on the freehold property and are repayable on
31 March 20Y5. The interest rate is variable, currently 6%.
14 Provisions
Warranty Returns
provision provision Total
£'000 £'000 £'000
Additions X X X
Amounts used during year (X) (X) (X)
The warranty provision relates to estimated claims on those products sold in the year ended
31 March 20X6 which come with a one year warranty. A weighted average method is used to
provide a best estimate. It is expected that the expenditure will be incurred in the next year.
The returns provision relates to an open returns policy offered on all goods. Customers are given
28 days in which to return goods and obtain a full refund. The provision at the year end is based
on a percentage, using past experience, of the number of sales made in March 20X6.
15 Dividends
The dividends recognised in the statement of changes in equity comprise:
Per share £'000
Final dividend for 20X5 Xp X
Interim dividend for 20X6 Xp X
Xp X
A resolution proposing a final dividend for 20X6 of Xp per share, £X in total, will be put to the
Annual General Meeting.
16 Events after the reporting period
Following a decision of the board, a freehold property was classified as held for sale on
1 May 20X6. The sale was completed on 15 June 20X6, realising a gain of £X after tax of £X. The
transaction will be reflected in the company's financial statements to 31 March 20X7.

17 Contingent liabilities
The company is being sued in the US for damages of $X million (approximately £X million) in
respect of sale of faulty goods. The directors do not expect to lose the case and do not believe any
provision needs to be made.
18 Commitments
Capital commitments
Capital expenditure on property, plant and equipment contracted for at the end of the reporting
period but not recognised in these financial statements amounted to £X.
Operating lease commitments
At the year end the company had commitments to make payments under non-cancellable
operating leases, which fall due as follows:
£'000
Within one year X
Two to five years X
More than five years X
X
19 Goodwill arising during the year
X 50p ordinary shares were issued on 30 December 20X5 to acquire the assets and trade of A Ltd.
Details of the consideration and assets acquired were as follows:
£'000
Fair value of assets acquired:
Short leasehold property X
Inventories X
X
Goodwill X
Fair value of consideration transferred X
The statement of profit or loss includes revenue of £X and profit of £X in relation to this trade since
the date of acquisition. If the acquisition had been made on 1 April 20X5, profit or loss would have
included revenue of £X and profit of £X.
20 Discontinued operations
Division A is being closed down and was classified as held for sale on 1 February 20X6. Completion
of the closure and accompanying sale is expected by the end of September 20X6. The carrying
amount of assets held for sale was £X on 31 March 20X6. The results of Division A for the year
ended 31 March 20X6 were: revenue £X, expenses £X, pre-tax loss £X, tax in respect of the
pre-tax loss £X, loss on the remeasurement of assets at fair value less costs to sell £X and tax in
respect of that remeasurement loss £X.
21 Reconciliation of profit/loss before tax to cash generated from operations for the year
£'000
Profit/(loss) before tax X/(X)
Finance cost X
Investment income (X)
Depreciation charge X
Amortisation charge X
Loss/(profit) on disposal of non-current assets X/(X)
(Increase)/decrease in inventories (X)/X
(Increase)/decrease in trade and other receivables (X)/X
(Increase)/decrease in prepayments (X)/X
Increase/(decrease) in trade and other payables (X)/X
Increase/(decrease) in accruals (X)/X
Increase/(decrease) in provisions (X)/X
Cash generated from operations X

22 Cash and cash equivalents
P
Cash and cash equivalents consist of cash on hand and balances with banks, and investments in
A
money market instruments. Cash and cash equivalents included in the statement of cash flows R
comprise the following amounts. T
£'000
Cash on hand and balances with banks X
Short-term investments X
Cash and cash equivalents X
F
The company has undrawn borrowing facilities of £Xm of which only £Xm may be used for future
expansion.
During the period the company acquired property, plant and equipment with an aggregate cost of
£X of which £X was acquired by finance lease. Cash payments of £X were made to purchase
property, plant and equipment.
24 Details of Specimen plc
The company is incorporated in England. In the opinion of the directors, the immediate and
ultimate controlling party of the company is its parent company, XYZ Ltd, a company incorporated
in the Isle of Man. No transactions took place between the company and XYZ Ltd during the year
and there are no outstanding balances.


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The Institute of Chartered Accountants in England and Wales

For exams in 2018

First edition 2017

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British Library Cataloguing-in-Publication Data

Originally printed in the United Kingdom on paper obtained from traceable,

Purpose of this Supplement vi

A Overview of the transition from FAR (UK GAAP) to CR (IFRS) 1

C Terminology translation (UK GAAP vs IRS terminology) 17

D Key differences from UK GAAP 21

1. Reporting framework and ethics 23

2. Format of financial statements 35

3. Reporting financial performance 47

4. Property, plant and equipment 57

6. Revenue and inventories 79

9. Other standards 103

10. Group accounts: basic principles 111

11. Consolidated statement of financial position 125

12. Consolidated statements of financial performance 135

13. Associates and joint ventures 137

14. Group accounts: disposals 149

15. Group statement of cash flows 151

E IFRS with no UK equivalent: Earnings per share 153

F Model financial statements 165

vi Corporate Reporting – IFRS Supplement

Overview of the transition

Priority Essential difference

2 Corporate Reporting – IFRS Supplement

A: Overview of the transition from FAR (UK GAAP) to CR (IFRS) 3

1.1 Terminology and formats

1.3 Discontinued operations

4 Corporate Reporting – IFRS Supplement

1.5 Property, plant and equipment

1.6 Intangible assets

1.7 Government grants

1.8 Financial instruments

A: Overview of the transition from FAR (UK GAAP) to CR (IFRS) 5

1.10 Non-controlling interest

1.11 Exclusion of a subsidiary from consolidation

1.12 Associates and joint ventures

1.13 Fair presentation vs true and fair view

6 Corporate Reporting – IFRS Supplement

2 Transition to Corporate Reporting (Advanced Level)

2.1 The importance of integration

2.2 Brought forward knowledge

A: Overview of the transition from FAR (UK GAAP) to CR (IFRS) 7

8 Corporate Reporting – IFRS Supplement

10 Corporate Reporting – IFRS Supplement

 Four measurement bases are described, being historical cost,

Section 14: Investments in  No simplified guidance is provided on recognising an associate

12 Corporate Reporting – IFRS Supplement

Section 19: Business  A more open definition of a business combination is provided

Section 24: Government  Government grants should be recognised on a systematic basis

14 Corporate Reporting – IFRS Supplement

18 Corporate Reporting Supplement – IFRS

1.1 IFRS terminology

UK term (Companies Act) International term (IFRS or FRS 102)

Profit and loss account Statement of profit or loss (or statement of

Operating profit Profit from operations

Balance sheet Statement of financial position

Fixed assets Non-current assets

Net book value Carrying amount C

Tangible fixed assets Property, plant and equipment